-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GXgG8JNdzY+FZRGBtFPK2zDh3LFKvwvFXVBQzpnJEzy/371RXghVn/gJgM9tQiHJ T85naxOuSWy5khkFuiNW9Q== 0000950144-97-010768.txt : 19971010 0000950144-97-010768.hdr.sgml : 19971010 ACCESSION NUMBER: 0000950144-97-010768 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 19971008 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVINCE HEALTHCARE CO CENTRAL INDEX KEY: 0001044942 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-GENERAL MEDICAL & SURGICAL HOSPITALS, NEC [8062] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-34421 FILM NUMBER: 97692652 BUSINESS ADDRESS: STREET 1: 109 WESTPARK DR STREET 2: STE 180 CITY: BRENTWOOD STATE: TN ZIP: 37027 BUSINESS PHONE: 6153701377 MAIL ADDRESS: STREET 1: 109 WESTPARK DR SUITE 180 STREET 2: 109 WESTPARK DR SUITE 180 CITY: BRENTWOOD STATE: TN ZIP: 37207 S-1/A 1 PROVINCE HEALTHCARE COMPANY FORM S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997 REGISTRATION NO. 333-34421 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- PROVINCE HEALTHCARE COMPANY (Exact name of registrant as specified in its charter) --------------------- DELAWARE 8062 62-1710772 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
109 WESTPARK DRIVE, SUITE 180 BRENTWOOD, TENNESSEE 37027 TELEPHONE: (615) 370-1377 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------------- RICHARD D. GORE 109 WESTPARK DRIVE, SUITE 180 BRENTWOOD, TENNESSEE 37027 TELEPHONE: (615) 370-1377 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: H. KURT VON MOLTKE J. VAUGHAN CURTIS KIRKLAND & ELLIS ALSTON & BIRD LLP 200 EAST RANDOLPH DRIVE 1201 WEST PEACHTREE STREET CHICAGO, ILLINOIS 60601 ATLANTA, GEORGIA 30309 (312) 861-2000 (404) 881-7000
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act of 1933, please check the following box. [ ] --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION OCTOBER 8, 1997 5,700,000 SHARES [LOGO] PROVINCE HEALTHCARE COMMON STOCK ------------------ All of the shares of Common Stock, par value $0.01 per share (the "Common Stock") of Province Healthcare Company ("Province" or the "Company"), offered hereby are being sold by the Company. Prior to this offering there has been no public market for the Common Stock. It is presently estimated that the initial public offering price will be between $13.00 and $15.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. Application has been made for the approval and trading of the Common Stock on the Nasdaq National Market under the symbol "PRHC." Upon completion of the offering, officers and directors of the Company and affiliates of the Company's officers and directors will beneficially own 49.3% of the Common Stock (46.7% if the Underwriters' over-allotment option is exercised in full). Accordingly, officers and directors of the Company and affiliates of the Company's officers and directors acting in concert will effectively be able to control the election of directors and management and operations of the Company. See "Risk Factors -- Effective Control by Certain Stockholders." ------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 11. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=============================================================================================================== PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS COMPANY(1) - --------------------------------------------------------------------------------------------------------------- Per Share........................ $ $ $ - --------------------------------------------------------------------------------------------------------------- Total(2)......................... $ $ $ ===============================================================================================================
(1) Before deducting expenses of the offering estimated at $1,200,000, payable by the Company. (2) The Company has granted the Underwriters a 30-day option to purchase up to 855,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of the Common Stock will be made at the offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about , 1997. BT ALEX. BROWN BANCAMERICA ROBERTSON STEPHENS GOLDMAN, SACHS & CO. THE ROBINSON-HUMPHREY COMPANY THE DATE OF THIS PROSPECTUS IS , 1997. 3 [PHOTOGRAPHS OF THE COMPANY'S EIGHT HOSPITALS] THE UNDERWRITERS AND OTHER PERSONS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the Consolidated Financial Statements and the related Notes thereto appearing elsewhere in this Prospectus. THE COMPANY Province Healthcare Company is a provider of health care services in attractive non-urban markets in the United States. In developing a platform for the provision of health care services within target markets, the Company seeks to acquire hospitals which are the sole or primary providers of health care in those communities. After acquiring a hospital, the Company seeks to improve the hospital's operating performance and to broaden the range of services provided to the community. The Company offers a wide range of inpatient and outpatient medical services and also provides specialty services, including skilled nursing, geriatric psychiatry and rehabilitation. The Company currently owns or leases eight general acute care hospitals in four states with a total of 570 licensed beds. The Company also provides management services to 50 primarily non-urban hospitals in 17 states with a total of 3,448 licensed beds. For the year ended December 31, 1996, and the six months ended June 30, 1997, the Company had net operating revenue of $129.9 million and $80.9 million, respectively. The Company believes that non-urban markets are attractive to health care service providers. Because non-urban service areas have smaller populations, there are generally only one or two hospitals in each non-urban market, resulting in less competition. The relative dominance of the acute care hospital in these smaller markets also limits the entry of alternate site providers, which provide services such as outpatient surgery, rehabilitation or diagnostic imaging. The demographic characteristics of non-urban markets and the relative strength of the local hospital also make non-urban markets less attractive to HMOs and other forms of managed care. In addition, the Company believes that non-urban communities are generally characterized by a high level of patient and physician loyalty that fosters cooperative relationships among the local hospital, physicians and patients. Despite these attractive characteristics, many not-for-profit and governmental operators of non-urban hospitals are under pressure due to capital constraints, limited management resources and the challenges of managing in a complex health care regulatory environment. These pressures often result in diminished operating and financial performance which can lead owners to sell or lease their hospitals to companies, like Province, that have greater financial and management resources. The Company's objective is to be the leading provider of high quality health care in selected non-urban markets. To achieve this end, the Company seeks to acquire hospitals which are the primary providers of health care in their markets and which present the opportunity to increase profitability and market share. The Company targets acquisition candidates that: (i) have a minimum service area population of 20,000 with a stable or growing employment base; (ii) are the sole or primary providers of health care services in the community; (iii) have annual net patient revenue of at least $12.0 million; and (iv) have financial performance that will benefit from Province management's proven operating skills. The Company's goal is to acquire two to four hospitals each year of the approximately 1,100 non-urban hospitals that fit the Company's acquisition profile. Following the acquisition of a hospital, the Company implements its systematic policies and procedures to improve the hospital's operating and financial performance. Key elements of the Company's operating strategy are to: (i) expand the breadth of services offered in the community to increase local market share; (ii) improve hospital operations by implementing appropriate expense controls, managing staffing levels, reducing supply costs, and renegotiating certain vendor contracts; (iii) recruit additional general practitioners and specialty physicians to the community; and (iv) form relationships with local employers and regional tertiary providers to solidify the position of the Company's hospital as the focal point of the community's health care delivery system. The 3 5 Company expects to make capital expenditures and to incur operating costs in implementing this strategy, which management believes will be offset by increases in market share and profitability resulting from such implementation. Prior to its 1996 recapitalization and merger with PHC of Delaware, Inc. ("PHC"), the Company operated under the name Brim, Inc. ("Brim"). The current operations of the Company include certain Brim operations and all of the operations of PHC. Brim and its predecessors have provided health care services, including managing and operating non-urban hospitals, since the 1970s. PHC was founded in February 1996 by Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR Fund IV") and Martin S. Rash to acquire and operate hospitals in attractive non-urban markets. In December 1996, Brim was recapitalized (the "Recapitalization"). Subsequently, the operations of Brim and PHC were combined in a merger (the "Merger"). In connection with the Recapitalization, Mr. Rash and Richard D. Gore were elected as the senior management of the Company. The Company's management team has extensive experience in acquiring and operating previously under-performing non-urban hospitals. Prior to co-founding PHC, Mr. Rash was the Chief Operating Officer of Community Health Systems, Inc. ("Community"), an acquiror and operator of non-urban hospitals. During Mr. Rash's tenure, Community acquired many non-urban hospitals and owned or leased 36 hospitals at December 31, 1995. Mr. Gore was previously employed as Vice President and Controller of Quorum Health Group, Inc., an owner, operator and manager of acute care hospitals. John M. Rutledge, the Company's Chief Operating Officer, was previously employed as a Regional Vice President/Group Director at Community, reporting directly to Mr. Rash. Steven P. Taylor, the Company's Senior Vice President of Acquisitions and Development, was previously President of Brim Healthcare, Inc., a subsidiary of the Company. THE OFFERING Common Stock offered by the Company................ 5,700,000 shares Common Stock to be outstanding after the offering......................................... 15,698,314 shares(1) Use of proceeds.................................... To repay certain indebtedness, to redeem a portion of the Company's preferred stock and to repurchase a portion of the shares of Common Stock issued upon conversion of preferred stock. See "Use of Proceeds." Proposed Nasdaq National Market symbol............. "PRHC"
- --------------- (1) Gives effect to the conversion of the Company's outstanding Series B Junior Preferred Stock, no par value (the "Junior Preferred Stock") into 2,451,218 shares of Common Stock and the repurchase of 1,034,414 of such shares of Common Stock (in each case at an assumed initial public offering price of $14.00 per share), but does not include 385,765 shares of Common Stock issuable upon the exercise of outstanding options issued pursuant to the Company's 1997 Long-Term Equity Incentive Plan at a weighted average exercise price of $3.38 per share. 4 6 SUMMARY CONSOLIDATED FINANCIAL AND STATISTICAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------- --------------------------- PRO PRO FORMA FORMA 1994 1995 1996 1996(1) 1996 1997 1997(1) -------- -------- -------- -------- ------- ------- ------- STATEMENTS OF OPERATIONS DATA: Net operating revenue.................... $102,067 $101,214 $129,855 $153,136 $58,290 $80,861 $80,861 Operating expenses(2).................... 96,870 98,077 128,689 151,322 53,466 71,599 71,599 Interest expense......................... 760 589 2,523 5,389 847 3,941 2,459 Costs of recapitalization................ -- -- 11,570 11,570 -- -- -- Loss (gain) on sale of assets............ (635) (2,814) 442 442 106 (159) (159) -------- -------- -------- -------- ------- ------- ------- Income (loss) from continuing operations before provision for income taxes...... 5,072 5,362 (13,369) (15,587) 3,871 5,480 6,962 Provision (benefit) for income taxes..... 2,097 1,953 (4,464) (5,328) 1,846 2,081 2,659 -------- -------- -------- -------- ------- ------- ------- Income (loss) from continuing operations............................. 2,975 3,409 (8,905) $(10,259) 2,025 3,399 $ 4,303 ======== ======= Income (loss) from discontinued operations, less applicable income taxes.................................. (157) (264) 6,015 182 -- -------- -------- -------- ------- ------- Net income (loss)........................ $ 2,818 $ 3,145 (2,890) 2,207 3,399 ======== ======== Preferred stock dividends and accretion.............................. (172) -- (2,384) -------- ------- ------- Net income (loss) applicable to common shareholders........................... $ (3,062) $ 2,207 $ 1,015 ======== ======= ======= Pro forma net income (loss) per share applicable to common shareholders(1)(3): Income (loss) from continuing operations........................... $ (1.03) $ (0.64) $ 0.23 $ 0.11 $ 0.27 ======== ======= Income from discontinued operations.... 0.68 0.02 -- -------- ------- ------- Net income (loss) applicable to common shareholders......................... $ (0.35) $ 0.25 $ 0.11 ======== ======= ======= Pro forma shares used in computing net income (loss) per share applicable to common shareholders(1)(3).............. 8,843 15,959 8,843 8,843 15,959 CASH FLOW DATA: Net cash provided by (used in) operations............................. 2,661 3,694 1,766 7,442 (1,543) Net cash used in investing activities.... (714) (1,527) (17,344) (6,668) (5,651) Net cash (used in) provided by financing activities............................. (2,605) (1,699) 24,547 329 1,954
JUNE 30, 1997 ---------------------------- PRO FORMA ACTUAL AS ADJUSTED(4) -------- -------------- BALANCE SHEET DATA: Cash and cash equivalents................................. $ 6,016 $ 10,424 Total assets.............................................. 96,853 101,261 Long-term obligations, less current maturities............ 78,436 41,804 Mandatory redeemable preferred stock...................... 46,340 -- Common stockholders' equity (deficit)..................... (60,308) 29,515
See accompanying notes on following page. 5 7
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------- ----------------- 1994 1995 1996 1996 1997 ------- ------- -------- ------- ------- STATISTICAL DATA(5): Hospitals owned or leased (at end of period).............. 4 4 7 5 7 Licensed beds (at end of period).......................... 294 294 513 371 517 Admissions................................................ 8,868 8,839 11,460 5,101 7,371 Patient days.............................................. 57,161 56,088 64,647 29,368 40,837 Adjusted patient days(6).................................. 91,047 92,085 115,805 50,992 73,367 Average length of stay (days)(7).......................... 6.5 6.4 5.6 5.8 5.5 Gross outpatient service revenue (in thousands)........... $46,312 $51,414 $ 78,561 $32,336 $53,680 Gross outpatient service revenue (% of gross patient service revenue)........................................ 37.2% 39.1% 44.2% 42.4% 44.3% EBITDAR (in thousands)(8)................................. $10,508 $ 9,041 $ 11,311 $ 8,273 $14,635 EBITDAR margin(9)......................................... 10.3% 8.9% 8.7% 14.2% 18.1%
- --------------- (1) Pro forma 1996 and 1997 statements of operations data give effect to: (i) the operating results of the three hospitals acquired by the Company in 1996 (the "1996 Acquired Hospitals") for periods prior to their acquisition; (ii) the sale in July 1997 of 3,755 shares of Junior Preferred Stock and 958,225 shares of Common Stock; (iii) Leeway & Co.'s exercise in September 1997 of its warrant to purchase 343,265 shares of Common Stock; (iv) the conversion of the Junior Preferred Stock and accumulated and unpaid dividends with an aggregate carrying amount of approximately $33.1 million into 2,451,218 shares of Common Stock in connection with the offering (the "Preferred Stock Conversion"); and (v) the sale of the Common Stock in the offering, and the application of the estimated net proceeds thereof to the repurchase of the Common Stock issued with respect to 13,636 of the shares of Junior Preferred Stock, the redemption of the Company's Series A Senior Preferred Stock, no par value (the "Senior Preferred Stock") and the repayment of debt, as described in "Use of Proceeds," as if all such transactions had been completed as of January 1, 1996 and assuming an initial public offering price of $14.00 per share. Net income (loss) per share applicable to common shareholders on the 1996 and 1997 pro forma amounts are based on the same assumptions outlined above. (2) Includes an increase in insurance expense in the second half of 1996 due to a change in estimate of $2.1 million. (3) Pro forma net income (loss) per share applicable to common shareholders for the historical year ended December 31, 1996 and the historical six months ended June 30, 1996 and 1997 is computed using the weighted average number of shares of Common Stock outstanding during the period, including dilutive common equivalent shares from stock options and warrants (using the treasury stock method). The 7,280,020 common shares issued in the Recapitalization and the Merger in December 1996 have been included in the pro forma calculation as if the Recapitalization and the Merger had occurred as of the first day of 1996. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, all other Common Stock issued, and Common Stock options and warrants granted by the Company at prices below the initial public offering price during the twelve-month period prior to the initial public offering have been included in the calculation as if they were outstanding for the full fiscal year (using the treasury stock method). Historical net income (loss) per share has not been presented since the historical capitalization of the Company is not meaningful due to the significant change in the capital structure of the Company resulting from the Recapitalization. Supplemental pro forma net income (loss) per share applicable to common shareholders as required by Accounting Principles Board Opinion No. 15, Earnings per Share, has not been presented as that information is provided in the pro forma net income (loss) per share applicable to common shareholders presentation referred to in (1) above. (4) The pro forma as adjusted balance sheet data as of June 30, 1997 gives effect to: (i) the sale in July 1997 of 3,755 shares of Junior Preferred Stock and 958,225 shares of Common Stock; (ii) the payment in July 1997 of $211,200 on the note receivable for Common Stock; (iii) Leeway & Co.'s exercise in September 1997 of its warrant to purchase 343,265 shares of Common Stock; (iv) the conversion from no par value to $0.01 par value Common Stock in connection with the Reincorporation (as defined below); (v) the Preferred Stock Conversion; and (vi) the sale of Common Stock in the offering and the application of the estimated net proceeds thereof to the repurchase of Common Stock issued with respect to 13,636 of the shares of Junior Preferred Stock, the redemption of Senior Preferred Stock and the repayment of debt, as described in "Use of Proceeds," as if all such transactions had been completed as of June 30, 1997 and assuming an initial public offering price of $14.00 per share. (5) Excludes Fifth Avenue Hospital in Seattle, Washington, which was sold in May 1995. (6) Adjusted patient days have been calculated based on an industry-accepted, revenue-based formula (multiplying actual patient days by the sum of gross inpatient revenue and gross outpatient revenue and dividing the result by gross inpatient revenue for each hospital) to reflect an approximation of the number of inpatients and outpatients served. (7) Average length of stay is calculated based on the number of patient days divided by the number of admissions. (8) "EBITDAR" is defined to mean earnings before interest, taxes, depreciation and amortization, rentals and leases, cumulative effect of change in accounting method, costs of the Recapitalization, loss (gain) on sale of assets, and income (loss) from discontinued operations, net of taxes. EBITDAR has been adjusted in 1996 to exclude the increase in insurance expense due to a change in estimate of $2.1 million. Investors should consider cash flow in evaluating financial performance. Cash flow trends may not mirror EBITDAR trends. The items excluded from EBITDAR are significant components in understanding and assessing the Company's financial performance. The Company has included EBITDAR data because such data are one measure in determining the enterprise value of the Company. 6 8 EBITDAR reflects the operating results of the Company from a cash perspective. The Company believes discussion of EBITDAR provides meaningful information to the reader of the financial statements and allows investors to better determine the ability of the Company to meet its future debt service, capital expenditure, and working capital requirements and to incur additional indebtedness. By including rentals and leases expense in the definition of EBITDAR, the results are comparable to those results which would be obtained if the Company had chosen to purchase, rather than lease, assets. The choice to purchase assets would have resulted in depreciation expense, a noncash item. EBITDAR is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. The Company's computations of EBITDAR may not be comparable to other similarly titled measures of other companies. (9) EBITDAR margin represents EBITDAR divided by net operating revenue. Investors should consider cash flow in evaluating financial performance. Cash flow trends may not mirror EBITDAR Margin trends. The items excluded from EBITDAR Margin are significant components in understanding and assessing the Company's financial performance. The Company believes discussion of EBITDAR Margin is meaningful to the reader of the financial statements to provide information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. The Company's computations of EBITDAR Margin may not be comparable to other similarly titled measures of other companies. 7 9 FORWARD-LOOKING STATEMENTS Certain statements in this Prospectus Summary and under the captions "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," and elsewhere in this Prospectus, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in regions where the Company operates; demographic changes; the effect of existing or future governmental regulation and federal and state legislative and enforcement initiatives on the Company's business, including the recently-enacted Balanced Budget Act of 1997; changes in Medicare and Medicaid reimbursement levels; the Company's ability to implement successfully its acquisition and development strategy and changes in such strategy; the availability and terms of financing to fund the expansion of the Company's business, including the acquisition of additional hospitals; the Company's ability to attract and retain qualified management personnel and to recruit and retain physicians and other health care personnel to the non-urban markets it serves; the effect of managed care initiatives on the non-urban markets served by the Company's hospitals and the Company's ability to enter into managed care provider arrangements on acceptable terms; the effect of liability and other claims asserted against the Company; the effect of competition in the markets served by the Company's hospitals; and other factors referenced in this Prospectus. Certain of these factors are discussed in more detail elsewhere in this Prospectus. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. See "Risk Factors." Unless the context otherwise requires, references in this Prospectus to "Province" or the "Company" shall mean Province Healthcare Company and its predecessors (including Principal Hospital Company, formerly known as Brim, Inc.), together with Province Healthcare Company's direct and indirect subsidiaries. Unless otherwise indicated, all information contained in this Prospectus: (i) has been adjusted to give effect to the Recapitalization, the Merger, the 3-for-1 stock split effected in May 1997, and the Reincorporation (as defined below); and (ii) assumes no exercise of the Underwriters' over-allotment option. 8 10 THE COMPANY Prior to the Recapitalization and the Merger with PHC, the Company operated under the name Brim, Inc. The current operations of the Company include certain Brim operations and all of the operations of PHC. Brim and its predecessors have provided health care services, including managing and operating non-urban hospitals, since the 1970s. PHC was founded in February 1996 by GTCR Fund IV and Mr. Rash to acquire and operate hospitals in non-urban communities in the United States. In December 1996, Brim was recapitalized. Following the Recapitalization, new members of the Board of Directors were elected, and Messrs. Rash and Gore were elected as Brim's Chief Executive Officer and Chief Financial Officer, respectively; the operations of Brim and PHC were combined in the Merger; and the Company operated under the name Principal Hospital Company. During 1996, prior to the Recapitalization, PHC purchased Memorial Mother Frances Hospital in Palestine, Texas and leased Starke Memorial Hospital in Knox, Indiana, and Brim leased Parkview Regional Hospital in Mexia, Texas (collectively, the "1996 Acquisitions"). In August 1997, the Company leased Needles Desert Community Hospital in Needles, California (the "Needles Acquisition"). In October 1997, the Company's predecessor, Principal Hospital Company, will be merged with and into Province Healthcare Company, a Delaware corporation, to change the name and jurisdiction of incorporation of Principal Hospital Company and to make certain other changes to the Company's authorized capitalization (the "Reincorporation"). The Company's principal executive offices are located at 109 Westpark Drive, Suite 180, Brentwood, Tennessee 37027, and its telephone number is (615) 370-1377. THE RECAPITALIZATION AND THE MERGER On December 18, 1996, Brim was recapitalized pursuant to an Investment Agreement among GTCR Fund IV, Brim and PHC. Prior to the Recapitalization, Brim was owned by certain of its officers and employees, and PHC was controlled by GTCR Fund IV, which owned 82.1% of its common stock. Following the Recapitalization, GTCR Fund IV controlled both Brim and PHC, and merged a subsidiary of Brim into PHC. The combination was accounted for as a merger of businesses under common control. The basic elements of the December 1996 recapitalization of the Company included the following: GTCR Fund IV and other investors purchased new shares of the Company's common and preferred stock. The Company sold its senior living business and entered into a new credit facility to, along with the proceeds from the sale of the new shares, provide financing for the redemption of a portion of the pre-existing common and preferred stock; this pre-existing common and preferred stock was redeemed; and certain pre-existing debt was repaid. The recapitalization was accounted for as such and, accordingly, did not result in a new basis of accounting. Upon completion of the recapitalization, GTCR Fund IV controlled the Company and also controlled PHC, a company unrelated to Brim that GTCR Fund IV founded in February 1996. Since both companies are engaged in the business of owning, leasing and managing hospitals in non-urban communities, GTCR Fund IV then merged PHC into Brim so that the two companies would be under the same corporate structure and management. As a result of the Recapitalization and the subsequent Merger with PHC, and immediately thereafter, the Company was controlled by GTCR Fund IV, and the Common Stock ownership of the Company was as follows: certain pre-Recapitalization Brim shareholders (the "Continuing Shareholders") -- 10.9%; GTCR Fund IV -- 61.0%; Leeway & Co. -- 11.5%; Messrs. Rash and Gore -- 15.7%; and two banks -- 0.9%. After giving effect to: (i) the sale in July 1997 by the Company of shares of its Junior Preferred Stock and Common Stock; (ii) the exercise in September 1997 of the warrant held by Leeway & Co.; (iii) the Preferred Stock Conversion; and 9 11 (iv) the application of a portion of the proceeds of the offering to repurchase the Common Stock issued to GTCR Fund IV and Leeway & Co. with respect to 13,636 of their shares of Junior Preferred Stock (in the case of clauses (iii) and (iv) assuming an initial public offering price of $14.00 per share and as if such transactions occurred prior to the offering); the Common Stock ownership of the Company immediately prior to the issuance of shares of Common Stock pursuant to the offering will be as follows: the Continuing Shareholders -- 10.8%; GTCR Fund IV -- 59.0%; Leeway & Co. -- 15.3%; Messrs. Rash and Gore -- 13.9%; and two banks -- 1.0%. The principal elements of the Recapitalization included the following: - The outstanding common stock of certain of Brim's shareholders (the "Redeemed Shareholders") was exchanged for redeemable preferred stock (the "Redeemable Stock"). - GTCR Fund IV, Messrs. Rash and Gore, and two banks (together with Leeway & Co., the "Investors") purchased an aggregate of 1,912,124 shares of Common Stock and 6,805 shares of Junior Preferred Stock, for an aggregate purchase price of $7.5 million. - Leeway & Co. purchased 20,000 shares of Senior Preferred Stock, 3,752 shares of Junior Preferred Stock, 833,778 shares of Common Stock and a warrant to purchase 343,265 shares of Common Stock for an aggregate purchase price of $24.1 million. - Through a series of transactions, the Continuing Shareholders received 3,580 shares of Junior Preferred Stock and 795,562 shares of Common Stock in exchange for their Brim common stock. - Brim repaid its existing debt of $5.4 million and entered into a $100.0 million credit facility with First Union National Bank and certain other lenders and borrowed $35.0 million under the term loan portion of the facility and $37.0 million under the revolving credit portion of the facility. - Brim redeemed all of the Redeemable Stock for $42.3 million and settled outstanding stock options for $8.0 million. Brim also redeemed preferred stock held by General Electric Credit Corporation for $29.9 million. In connection with the Recapitalization, an aggregate of $11.6 million was charged to operations, consisting of $8.0 million paid to settle outstanding stock options, $2.2 million of severance payments and $1.4 million of transaction-related costs, principally professional fees. Following the Recapitalization, a subsidiary of Brim was merged into PHC, and PHC became a subsidiary of Brim. In connection with the Merger, the stockholders of PHC received an aggregate of 14,403 shares of Junior Preferred Stock and 3,738,556 shares of Common Stock, and PHC's existing debt of $19.6 million was repaid. 10 12 RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should consider carefully the following information relating to the Company and the Common Stock before making an investment in the Common Stock offered hereby. RISKS OF ACQUISITION STRATEGY A key element of the Company's growth strategy is expansion through the acquisition of acute care hospitals in attractive non-urban markets. There can be no assurance that the Company will be able to acquire hospitals which meet its target criteria on satisfactory terms, or of the number of such acquisitions the Company will make during a period of time. Expenses arising from the Company's efforts to complete acquisitions, increase services offered or increase its market penetration could have a material adverse effect on the Company's business, financial condition or results of operations. There can be no assurance that the Company will be able to implement its growth strategy successfully or manage its expanded operations effectively and profitably. The Company faces competition for acquisitions primarily from other for-profit health care companies as well as not-for-profit entities. Some of the Company's competitors have greater financial and other resources than the Company. Increased competition for the acquisition of non-urban acute care hospitals could have an adverse impact on the Company's ability to acquire such hospitals on favorable terms. Hospital acquisitions generally require a longer period to complete than acquisitions in many other businesses and are subject to additional uncertainty. In recent years, the legislatures and attorneys general of several states have shown a heightened level of interest in transactions involving the sale of hospitals by not-for-profit entities. Although the level of interest varies from state to state, the trend is to provide for increased governmental review, and in some cases approval, of transactions in which not-for-profit entities sell a health care facility. Attorneys general in certain states, including California, where the Company owns or leases four hospitals, have been especially active in evaluating these transactions. Although the Company has not yet been adversely affected as a result of these trends, such increased scrutiny may increase the difficulty or prevent the completion of transactions with not-for-profit organizations in certain states in the future, and may affect the Company's ability to exercise existing purchase options for hospitals, including the hospitals in Eureka, California (lease expires in December 2000) and Blythe, California (lease expires in December 2002, subject to a ten-year renewal option). EFFECT OF REIMBURSEMENT AND PAYMENT POLICIES; HEALTH CARE REFORM LEGISLATION The Company's owned and leased hospitals derive a substantial portion of their revenue from Medicare and Medicaid programs. Such programs are highly regulated and are subject to frequent and substantial changes. In recent years, changes in Medicare and Medicaid programs have resulted in limitations on, and reduced levels of, payment and reimbursement for a substantial portion of hospital procedures and costs. Congress recently enacted the Balanced Budget Act of 1997, which establishes a plan to balance the federal budget by fiscal year 2002, and includes significant additional reductions in spending levels for the Medicare and Medicaid programs. Federal and state proposals are pending that would impose further limitations on governmental payments to health care providers such as the Company and increase co-payments and deductibles. In addition, a number of states are considering legislation designed to reduce their Medicaid expenditures and to provide universal coverage and additional care and/or to impose additional taxes on hospitals to help finance or expand the states' Medicaid systems. Significant additional reductions in payment levels could have a material adverse effect on the business, financial condition and results of operations of the Company. 11 13 An increasing number of related legislative proposals have been introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level. Among the proposals under consideration or already enacted are price controls on hospitals, insurance market reforms to increase the availability of group health insurance coverage to small businesses, and requirements that all businesses offer health insurance coverage to their employees. While the Company anticipates that payments to hospitals will be reduced as a result of future federal and state legislation, it is uncertain at this time what legislation on health care reform may ultimately be enacted or whether other changes in the administration or interpretation of governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Business -- Health Care Reform, Regulation and Licensing." HEALTH CARE INDUSTRY INVESTIGATIONS Significant media and public attention has recently been focused on the hospital industry due to ongoing investigations reportedly related to certain referral, cost reporting, and billing practices, laboratory and home health care services and physician ownership and joint ventures involving hospitals. The alleged practices have been the subject of federal and state investigations, as well as other proceedings. As part of its hospital operations, the Company operates laboratories and provides some home health care services. The Company also has significant Medicare and Medicaid billings. The Company monitors its billing practices for compliance with applicable law, in accordance with standard industry interpretations of such laws. For example, in public statements surrounding these current investigations, governmental authorities have taken positions on issues ranging from the legality of physician ownership in healthcare facilities in which they perform services, to the propriety of including marketing costs in the Medicare cost report of hospital-affiliated home health agencies. These positions appear to be inconsistent with practices that are common within the industry and which have not previously been challenged in this manner. Moreover, in certain instances, government investigations that have in the past been conducted under the civil money penalty provisions of applicable law, are now being investigated under criminal provisions of the Medicare Fraud and Abuse Laws. There can be no assurance that the Company or other hospital operators will not be the subject of future investigations or inquiries. The positions taken by authorities in the current investigations or any future investigations of the Company or other providers could have a material adverse effect on the Company's business, financial condition or results of operations. See "-- Health Care Regulation" and "Business -- Health Care Reform, Regulation and Licensing" and "-- Hospital Operations -- Regulatory Compliance Program." DEPENDENCE ON MANAGEMENT The Company's success is largely dependent on the skills, experience and efforts of its senior management. The Company's operations are also dependent on the efforts, ability and experience of key members of its local management staffs. The loss of services of one or more members of the Company's senior management or of a significant portion of its local management staff could have a material adverse effect on the Company's business, financial condition or results of operations. The Company does not maintain key man life insurance policies on any of its officers. See "Management." DEPENDENCE ON PHYSICIANS The success of the Company's owned and leased hospitals is dependent upon the number and quality of the physicians on the medical staff of, or who admit patients to, such facilities, the admissions practices of such physicians and the maintenance of good relations between the 12 14 Company and such physicians. Hospital physicians are generally not employees of the Company and most staff physicians have admitting privileges at other hospitals. Only a limited number of physicians are interested in practicing in the non-urban communities in which the Company's hospitals are located, and the loss of physicians in these communities, or the inability of the Company to recruit physicians to these communities, could have a material adverse effect on the Company's business, financial condition and results of operations. The operations of the Company's hospitals may also be affected by the shortage of nurses and certain other health care professionals in these communities. See "Business -- Employees and Medical Staff." HEALTH CARE REGULATION The health care industry is subject to extensive federal, state and local laws and regulations relating to issues such as licensure, conduct of operations, ownership of facilities, addition of facilities and services, and prices for services, that are extremely complex and for which, in many instances, the industry has the benefit of little or no regulatory or judicial interpretation. In particular, Medicare and Medicaid anti-kickback amendments codified under Section 1128B(b) of the Social Security Act (the "Anti-kickback Amendments") prohibit certain business practices and relationships that might affect the provision and cost of health care services reimbursable under Medicare and Medicaid, including the payment or receipt of remuneration for the referral of patients whose care will be paid for by Medicare or other governmental programs. Sanctions for violating the Anti-kickback Amendments include criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as Medicare and Medicaid. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, the Department of Health and Human Services ("HHS") has issued regulations that describe some of the conduct and business relationships permissible under the Anti-kickback Amendments ("Safe Harbors"). The fact that a given business arrangement does not fall within a Safe Harbor does not render the arrangement per se illegal. Business arrangements of health care service providers that fail to satisfy the applicable Safe Harbor criteria, however, risk increased scrutiny by enforcement authorities. The "Health Insurance Portability and Accountability Act of 1996," which became effective January 1, 1997, amends, among other things, Title XI (42.U.S.C. 1301 et seq.) to broaden the scope of certain fraud and abuse laws to include all health care services, whether or not they are reimbursed under a federal program. See " -- Current Publicity." The Company provides financial incentives to recruit physicians into the communities served by its hospitals, including loans and minimum revenue guarantees. No Safe Harbor for physician recruitment is currently in force. The Company also enters into certain leases with physicians, and is a party to certain joint ventures with physicians. The Company is also a participant in a group purchasing joint venture. There can be no assurance that regulatory authorities who enforce the Anti-kickback Amendments will not determine that the Company's physician recruiting activities, other physician arrangements or group purchasing activities violate the Anti-kickback Amendments or other federal laws. Such a determination could subject the Company to liabilities under the Social Security Act, including exclusion of the Company from participation in Medicare and Medicaid. See "Business -- Health Care Reform, Regulation and Licensing." In addition, Section 1877 of the Social Security Act (commonly known as the "Stark Laws"), which restricts referrals by physicians of Medicare and other government-program patients to providers of a broad range of designated health services with which they have ownership or certain other financial arrangements, was amended effective January 1, 1995, to broaden significantly the scope of prohibited physician referrals under the Medicare and Medicaid programs to providers with which referring physicians have ownership or certain other financial arrangements (the "Self-Referral Prohibitions"). Many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care. The Company's participation in and development of joint ventures and other 13 15 financial relationships with physicians and others could be adversely affected by these amendments and similar state enactments. Both federal and state government agencies have announced heightened and coordinated civil and criminal enforcement efforts. One federal initiative, Operation Restore Trust, is focused on investigating health care providers in the home health and nursing home industries as well as on medical suppliers to these providers in 17 states, including California, Texas and Colorado, where the Company provides home health and nursing home care. The Office of Inspector General and Department of Justice have from time to time established enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Current initiatives include a focus on hospital billing for outpatient charges associated with inpatient services, as well as hospital laboratory billing practices. Some states require state approval for purchase, construction and expansion of health care facilities, including findings of need for additional or expanded health care facilities or services. Certificates of Need ("CONs"), which are issued by governmental agencies with jurisdiction over health care facilities, may be required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and certain other matters. Following a number of years of decline, the number of states requiring CONs is on the rise. There can be no assurances that the Company will be able to obtain required CONs. The laws, rules and regulations described above are subject to considerable interpretation. If a determination is made that the Company is in violation of such laws, rules or regulations, or if further changes in the regulatory framework occur, any such determination or changes could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Health Care Reform, Regulation and Licensing." COMPETITION Competition among hospitals and other health care providers in the United States has intensified in recent years as hospital occupancy rates have declined as a result of cost containment pressures, changing technology, changes in government regulation and reimbursement, changes in practice patterns (e.g., shifting from inpatient to outpatient treatments), the impact of managed care organizations, and other factors. The Company's hospitals face competition from larger tertiary care centers, outpatient service providers and other local non-urban hospitals, which provide similar services to those offered by the Company's hospitals. Some of the hospitals that compete with the Company are owned by governmental agencies or not-for-profit corporations supported by endowments and charitable contributions, and can finance capital expenditures on a tax-exempt basis. In addition, the Company faces competition for acquisitions primarily from for-profit hospital management companies as well as not-for-profit entities. Some of the Company's competitors are larger, may be more established and may have more capital and other resources than the Company. See "Business -- Competition." NEED FOR ADDITIONAL CAPITAL; SUBSTANTIAL INDEBTEDNESS The Company's acquisition program requires substantial capital resources. In addition, the operations of its existing hospitals require ongoing capital expenditures for renovation and expansion and the addition of costly medical equipment and technology utilized in the hospitals. The Company may incur indebtedness and may issue, from time to time, debt or equity securities to fund any such expenditures. There can be no assurance that sufficient financing will be available on terms satisfactory to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- Business Strategy." As of June 30, 1997, after giving effect to: (i) the Investors' purchases in July 1997 of Junior Preferred Stock and Common Stock; (ii) Leeway & Co.'s exercise of its warrant to purchase Common 14 16 Stock; (iii) the Preferred Stock Conversion; and (iv) the application of the net proceeds of the offering, the Company's total long-term debt (excluding current maturities) would be $41.8 million or 58.6% of its total capitalization. The Company has a $100.0 million line of credit with a group of banks and is presently discussing an increase of the line of credit to $175.0 million to $200.0 million. See "Capitalization," "Pro Forma Condensed Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The degree to which the Company is leveraged could have important consequences to holders of the Common Stock, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of principal and interest on its indebtedness, thereby reducing the funds available to the Company for its operations; (iii) certain of the Company's borrowings are at variable rates of interest, which makes the Company vulnerable to increases in interest rates; and (iv) such indebtedness contains numerous financial and other restrictive covenants (including restrictions on payments of dividends, incurrences of indebtedness and sales of assets), the failure to comply with which may result in an event of default which, if not cured or waived, could cause such indebtedness to be declared immediately due and payable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." CONCENTRATION OF HOSPITALS IN CALIFORNIA Four of the Company's eight owned and leased hospitals are located in California and, excluding Needles Desert Community Hospital in Needles, California which was acquired in August 1997, for the six months ended June 30, 1997, 39.8% of the Company's net operating revenue was derived from its hospitals located in California. Accordingly, the Company may be particularly sensitive to economic, competitive and regulatory conditions in California. California has created a voluntary health insurance purchasing cooperative that seeks to make health care coverage more affordable for businesses with five to fifty employees and, effective January 1, 1995, began changing the payment system for participants in its Medicaid program in certain counties from fee-for-service arrangements to managed care plans. While none of the Company's hospitals are located in the counties targeted for conversion to managed care, if the state is able to implement successfully managed care in these counties, this initiative could be expanded throughout the state. Reduction in reimbursement levels in California, including reductions due to the implementation of managed care, could have a material adverse effect on the business, financial condition and results of operations of the Company. California recently adopted a law requiring standards and regulations to be developed to ensure hospitals meet seismic performance standards. Within three years after adoption of the standards by the California Building Standards Commission, owners of subject properties are to evaluate their facilities and develop a plan and schedule for complying with the standards. To date, the Commission has adopted evaluation criteria but has not yet adopted the retrofit standards. Therefore, the Company is unable, at this time, to evaluate its facilities to determine whether the requirements will have any material adverse effect on the Company's operations. PROFESSIONAL LIABILITY In recent years, physicians, hospitals and other health care providers have become subject to an increasing number of lawsuits alleging malpractice, product liability or related legal theories, many of which involve large claims and significant defense costs. To cover claims arising out of the operations of owned, leased and managed hospitals, the Company maintains professional malpractice liability insurance and general liability insurance in amounts that management believes 15 17 to be sufficient for its operations, although some claims may exceed the scope of the coverage in effect. The cost of malpractice and other liability insurance has risen significantly during the past few years. While the Company's professional and other liability insurance has been adequate in the past to provide for liability claims, there can be no assurance that such insurance will continue to be available for the Company to maintain adequate levels of insurance. The Company's management contracts with its managed hospitals generally require the hospital to indemnify the Company against certain claims and to maintain specified amounts of insurance, however, there can be no assurance the hospitals will maintain such insurance or that such indemnities will be available. EFFECTIVE CONTROL BY CERTAIN STOCKHOLDERS Upon completion of the offering, the Company's officers and directors and their affiliates as a group will beneficially own 49.3% of the outstanding shares of Common Stock, including the 37.7% of the shares of Common Stock which will be owned by GTCR Fund IV. As a result of such ownership, these stockholders, if acting together, will effectively have the ability to elect the Board of Directors and thereby control the affairs and management of the Company. This may have the effect of delaying, deferring or preventing a change in control of the Company. See "Principal Stockholders" and "Management." BENEFITS OF OFFERING TO CERTAIN STOCKHOLDERS The Company will receive net proceeds of approximately $73.0 million from the offering (at an assumed public offering price of $14.00 per share) after deduction of the underwriting discounts and estimated expenses of the offering. Of this amount, $21.9 million will be used to redeem the Senior Preferred Stock, including all accrued and unpaid dividends thereon, held by Leeway & Co., $12.1 million will be used to repurchase the Common Stock issued to GTCR Fund IV in respect of the conversion of 11,363 of its shares of Junior Preferred Stock, and $2.4 million will be used to repurchase the Common Stock issued to Leeway & Co. in respect of the conversion of 2,273 of its shares of Junior Preferred Stock. See "Use of Proceeds" and "Certain Relationships and Related Transactions." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Representatives of the Underwriters and may not be indicative of the market price for shares of the Common Stock after the offering. See "Underwriting." There can be no assurance that an active trading market will develop or be maintained or as to the price at which the Common Stock will trade if and when such a market develops. The Company has applied for approval and trading of the Common Stock on the Nasdaq National Market. The market price of the Common Stock may be subject to significant fluctuations in response to variations in the Company's operating results and other factors, including future acquisitions or divestitures of hospitals, market rates of interest, developments affecting the health care industry generally, the enactment of health care reform, reductions in payment rates and changes in governmental regulation. In addition, the stock market in recent years has experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies, and the price of the Common Stock could be affected by such fluctuations. ABSENCE OF DIVIDENDS The Company does not anticipate paying cash dividends in the foreseeable future. In addition, the terms of the Company's bank credit agreement prohibit the payment of cash dividends. Any future indebtedness incurred to refinance the Company's existing indebtedness or to fund future growth may prohibit or limit the Company's ability to pay dividends. See "Dividend Policy." 16 18 SUBSTANTIAL DILUTION The assumed initial public offering price of $14.00 per share will exceed the net tangible book value per share of the Common Stock after the offering by $12.70 per share. Purchasers of the Common Stock in the offering will experience immediate and substantial dilution in the amount of $12.70 per share, and present stockholders will experience an immediate and substantial increase in net tangible book value in the amount of $10.84 per share of Common Stock. The net tangible book value (deficit) of the Company at June 30, 1997 was $(69.4 million), or $(9.54) per share of Common Stock. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS There will be 15,698,314 shares of Common Stock outstanding upon completion of the offering (16,553,314 shares if the Underwriters over-allotment option is exercised in full). All of the 5,700,000 shares offered in the offering will be eligible for resale in the public market without restriction by persons other than affiliates of the Company upon completion of the offering. All of the remaining 9,998,314 shares of Common Stock are "restricted securities" as that term is defined in Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"). Commencing 90 days after the completion of the offering, 7,280,020 shares of Common Stock will be eligible for sale in the public market pursuant to Rule 144. The remaining restricted shares of Common Stock will become eligible for sale pursuant to Rule 144 thereafter. The Company, each of its officers and directors and substantially all of the current stockholders have agreed not to sell or otherwise dispose of any of the shares of Common Stock owned by them in the public market for a period of 180 days after the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated. Sales of substantial amounts of the Company's Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price for the Common Stock and could impair the Company's ability to raise additional capital through the sale of equity securities. See "Description of Capital Stock" and "Shares Eligible for Future Sale." In connection with the Recapitalization, the Company entered into a Registration Agreement (the "Registration Agreement") which provides certain demand and piggyback registration rights to the Company's current stockholders who hold an aggregate of 9,998,314 shares of Common Stock, substantially all of which shares are subject to the 180-day restrictions described above. The registration rights are subject to certain notice requirements, timing restrictions and volume limitations which may be imposed by the underwriters of such offering. See "Shares Eligible for Future Sale -- Registration Agreement." In addition, the Company expects to register the issuance of up to 1,300,000 shares of Common Stock authorized under its 1997 Long-Term Equity Incentive Plan following the offering. See "Management -- Long-Term Equity Incentive Plan." 17 19 USE OF PROCEEDS The net proceeds to the Company from the offering, after deducting estimated underwriting discounts and offering expenses and assuming an initial public offering price of $14.00 per share, are estimated to be $73.0 million ($84.1 million if the Underwriters' over-allotment option is exercised in full). Of this amount, $36.6 million will be used to reduce the outstanding term and revolving loan balance under the Credit Agreement, dated as of December 17, 1996, among the Company and the lenders named therein (the "Credit Agreement"); $21.9 million will be used to redeem in full the outstanding Senior Preferred Stock and all accrued and unpaid dividends thereon; and $14.5 million will be used to repurchase shares of Common Stock issued upon conversion of 13,636 of the shares of the Junior Preferred Stock held by GTCR Fund IV and Leeway & Co. See "Certain Relationships and Related Transactions." The Company continuously seeks out appropriate acquisition candidates and is frequently engaged in discussions regarding potential acquisitions. Borrowings under the Credit Agreement bear interest at a floating rate, which is calculated on the basis of the agent's prime rate, the federal funds rate or LIBOR, plus, in each case, a margin depending upon the Company's outstanding indebtedness. As of June 30, 1997, the effective rate was 8.5%. Borrowings under the revolving loan portion of the Credit Agreement mature on December 16, 1999 and borrowings under the term loan portion of the Credit Agreement mature on December 16, 2002. The Credit Agreement was entered into in connection with the Recapitalization. The Senior Preferred Stock, which will be redeemed with a portion of the proceeds of this offering, accrues dividends on a daily basis at a per annum rate of 11.0% on the sum of the liquidation value plus accumulated and unpaid dividends thereon ($21.9 million as of the assumed offering date of October 15, 1997). The Company would be required to redeem the Senior Preferred Stock in full on December 17, 2005. The Junior Preferred Stock, which will be converted to shares of Common Stock in connection with this offering, accrues dividends on a daily basis at a per annum rate of 8.0% on the sum of the liquidation value plus accumulated and unpaid dividends thereon ($34.3 million as of the assumed offering date of October 15, 1997). The Company would be required to redeem the Junior Preferred Stock in full on December 17, 2006. DIVIDEND POLICY The Company currently intends to retain its earnings for use in its business and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future. The Credit Agreement prohibits the payment of dividends by the Company (other than dividends paid in the Company's stock). Any future determination to declare or pay cash dividends will be made by the Board of Directors in light of the Company's earnings, financial position, capital requirements, credit agreements and such other factors as the Board of Directors deems relevant at such time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 6 of Notes to Consolidated Financial Statements. 18 20 CAPITALIZATION The following table sets forth as of June 30, 1997: (i) the capitalization of the Company; (ii) the capitalization of the Company on a pro forma basis; and (iii) the capitalization of the Company on a pro forma as adjusted basis to reflect the sale of the shares of Common Stock offered hereby (based on an assumed offering price of $14.00 per share) and the application of the estimated net proceeds therefrom all as if they occurred on June 30, 1997.
JUNE 30, 1997 --------------------------------------- PRO FORMA ACTUAL PRO FORMA(1) AS ADJUSTED ------- ------------ -------------- (IN THOUSANDS) Cash and cash equivalents.............................. $ 6,016 $10,424 $10,424 ======= ======= ======= Current maturities of long-term obligations............ $ 1,640 $ 1,640 $ 1,640 ======= ======= ======= Long-term obligations, less current maturities(2):..... $78,436 $78,436 $41,804 Mandatory redeemable preferred stock(3): Series A redeemable senior preferred stock, no par value, authorized: 25,000 shares; issued and outstanding: 20,000 shares (net of issuance and warrant costs of $843,000 and $139,000, respectively); 20,000 shares pro forma and no shares pro forma as adjusted...................... 19,018 19,018 -- Series B redeemable junior preferred stock, no par value, authorized: 50,000 shares; issued and outstanding: 28,540 shares (net of issuance costs of $1,218,000); no shares pro forma and pro forma as adjusted....................................... 27,322 -- -- ------- ------- ------- Total mandatory redeemable preferred stock........... 46,340 19,018 -- Common stockholders' equity (deficit): Common stock, no par value, authorized: 20,000,000 shares; issued and outstanding: 7,280,020 shares; $0.01 par value, authorized: 25,000,000 shares; issued and outstanding: 11,032,728 shares pro forma and 15,698,314 shares pro forma as adjusted(4)....................................... 3,276 110 157 Additional paid-in capital........................... -- 36,846 94,349 Notes receivable for Common Stock.................... (391) (180) (180) Common stock warrant................................. 139 -- -- Retained earnings (deficit).......................... (63,332) (64,811) (64,811) ------- ------- ------- Total common stockholders' equity (deficit)....... (60,308) (28,035) 29,515 ------- ------- ------- Total capitalization......................... $64,468 $69,419 $71,319 ======= ======= =======
- --------------- (1) Gives effect to: (i) the Investors' purchases in July 1997 of an aggregate of 3,755 shares of Junior Preferred Stock and 958,225 shares of Common Stock for an aggregate purchase price of $4.2 million; (ii) the payment in July 1997 of $211,200 on the note receivable for Common Stock; (iii) Leeway & Co.'s exercise in September 1997 of its warrant to purchase 343,265 shares of Common Stock; (iv) the conversion from no par value to $0.01 par value Common Stock in connection with the Reincorporation; and (v) the Preferred Stock Conversion. (2) For information regarding the Company's long-term obligations, see Note 6 of Notes to Consolidated Financial Statements. (3) For information regarding the Company's mandatory redeemable preferred stock, see Note 7 of Notes to Consolidated Financial Statements. (4) Excludes 385,765 shares of Common Stock issuable upon exercise of outstanding stock options with a weighted average exercise price of $3.38 per share. See "Management -- Long-Term Equity Incentive Plan" and Notes 8 and 17 of Notes to Consolidated Financial Statements. 19 21 DILUTION The net tangible book value (deficit) of the Company at June 30, 1997 was $(69.4 million), or $(9.54) per share of Common Stock. Net tangible book value (deficit) per share of Common Stock represents the amount of total assets less total liabilities, mandatory redeemable preferred stock, minority interests and intangible assets, divided by the number of shares of Common Stock outstanding at June 30, 1997. After giving effect to: (i) the sale in July 1997 of 3,755 shares of Junior Preferred Stock and 958,225 shares of Common Stock; (ii) Leeway & Co.'s exercise in September 1997 of its warrant to purchase 343,265 shares of Common Stock; (iii) the Preferred Stock Conversion; and (iv) the sale by the Company of the 5,700,000 shares of Common Stock offered hereby (at an assumed initial public offering price of $14.00 per share) and the application of the net proceeds as set forth under "Use of Proceeds," the pro forma net tangible book value of the Company at June 30, 1997 would have been $20.4 million, or $1.30 per share of Common Stock. This represents an immediate increase in net tangible book value of $10.84 per common share to existing stockholders and an immediate dilution of $12.70 per common share to investors purchasing Common Stock in the offering, as illustrated by the following table: Assumed initial public offering price....................... $14.00 ------ Net tangible book value (deficit) per common share prior to the offering(1)..................................... $(9.54) Increase per common share attributable to new investors... 10.84 ------ Pro forma net tangible book value per common share after the offering.................................................. 1.30 ------ Dilution per common share to new investors(2)............... $12.70 ======
The following table summarizes certain differences between the existing stockholders and the new investors with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing stockholders and new investors (based on an assumed initial public offering price of $14.00 per share), in each case on a pro forma basis after giving effect to: (i) the sale in July 1997 of 3,755 shares of Junior Preferred Stock and 958,225 shares of Common Stock; (ii) the payment in July 1997 of $211,200 on the note receivable for Common Stock; (iii) Leeway & Co.'s exercise in September 1997 of its warrant to purchase 343,265 shares of Common Stock; (iv) the conversion from no par value to $0.01 par value Common Stock in connection with the Reincorporation; (v) the Preferred Stock Conversion; and (vi) the sale of the shares of Common Stock in the offering and the application of the estimated net proceeds thereof to the redemption of Senior Preferred Stock, the repurchase of certain shares of Common Stock and the repayment of debt, as described in "Use of Proceeds".
SHARES PURCHASED TOTAL CONSIDERATION -------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing investors(1)............... 9,998,314 63.7% $ 23,692,593 22.9% $ 2.37 New investors....................... 5,700,000 36.3 79,800,000 77.1 $14.00 ---------- ----- ------------ ----- Total..................... 15,698,314 100.0% $103,492,593 100.0% ========== ===== ============ =====
- --------------- (1) Excludes common shares issuable upon the exercise of outstanding options to purchase 385,765 shares of Common Stock pursuant to the Company's 1997 Long-Term Equity Incentive Plan at a weighted average exercise price of $3.38 per share. (2) Dilution is determined by subtracting pro forma net tangible book value per common share after giving effect to this offering from the initial public offering price per share. Dilution to new investors will be $12.04 if the Underwriters' over-allotment option is exercised in full. 20 22 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company: (i) as of and for each of the five fiscal years ended December 31, 1996, which information has been derived from the audited consolidated financial statements of the Company; and (ii) as of and for the six-month periods ended June 30, 1996 and 1997, which information has been derived from consolidated financial statements of the Company which are unaudited but which, in the opinion of management, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary (consisting of normal recurring adjustments) for a fair presentation of the results for such periods. The selected consolidated financial data are qualified by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------ 1992 1993 1994 1995 1996 1996 1997 ------- ------- -------- -------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA:(1) Net operating revenue.................... $69,245 $84,859 $102,067 $101,214 $129,855 $58,290 $ 80,861 Operating expenses(2).................... 66,026 81,091 96,870 98,077 128,689 53,466 71,599 Interest expense......................... 969 896 760 589 2,523 847 3,941 Costs of recapitalization................ -- -- -- -- 11,570 -- -- Loss (gain) on sale of assets............ (7) (10) (635) (2,814) 442 106 (159) ------- ------- -------- -------- -------- ------- -------- Income (loss) from continuing operations before provision for income taxes...... 2,257 2,882 5,072 5,362 (13,369) 3,871 5,480 Provision (benefit) for income taxes..... 1,021 1,731 2,097 1,953 (4,464) 1,846 2,081 ------- ------- -------- -------- -------- ------- -------- Income (loss) from continuing operations............................. 1,236 1,151 2,975 3,409 (8,905) 2,025 3,399 Income (loss) from discontinued operations, less applicable income taxes........................... 496 593 (157) (264) 6,015 182 -- ------- ------- -------- -------- -------- ------- -------- Income (loss) before cumulative effect of change in accounting for income taxes.................................. 1,732 1,744 2,818 3,145 (2,890) 2,207 3,399 Cumulative effect of change in accounting for income taxes....................... -- 1,141 -- -- -- -- -- ------- ------- -------- -------- -------- ------- -------- Net income (loss)........................ $ 1,732 $ 2,885 $ 2,818 $ 3,145 (2,890) 2,207 3,399 ======= ======= ======== ======== Preferred stock dividends and accretion.............................. (172) -- (2,384) -------- ------- -------- Net income (loss) per share applicable to common shareholders.................... $ (3,062) $ 2,207 $ 1,015 ======== ======= ======== Pro forma net income (loss) per share applicable to common shareholders(3): Income (loss) from continuing operations............................. $ (1.03) $ 0.23 $ 0.11 Income from discontinued operations...... 0.68 0.02 -- -------- ------- -------- Net income (loss) applicable to common shareholders........................... $ (0.35) $ 0.25 $ 0.11 ======== ======= ======== Pro forma shares used in computing net income (loss) per share applicable to common shareholders(3)................. 8,843 8,843 8,843 Cash dividends declared per common share.................................. -- -- -- -- -- -- --
21 23
DECEMBER 31, JUNE 30, -------------------------------------------------- ------------------ 1992 1993 1994 1995 1996 1996 1997 ------- ------- -------- -------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA:(1) Cash and cash equivalents................ $ 538 $ 2,477 $ 1,819 $ 2,287 $ 11,256 $ 3,390 $ 6,016 Total assets............................. 29,512 42,895 46,057 47,075 94,025 53,154 96,853 Long-term obligations, less current maturities............................. 4,587 8,972 6,892 5,519 76,633 5,045 78,436 Mandatory redeemable preferred stock..... -- 8,816 8,816 8,816 46,227 8,816 46,340 Common stockholders' equity (deficit).... 6,514 9,305 11,640 14,666 (61,323) 26,700 (60,308) OTHER DATA:(1) EBITDAR(4)............................... $ 6,645 $ 7,813 $ 10,508 $ 9,041 $ 11,311 $ 8,273 $ 14,635 EBITDAR margin(5)........................ 9.6% 9.2% 10.3% 8.9% 8.7% 14.2% 18.1%
- --------------- (1) The Company's financial statements for the periods presented are not strictly comparable due to the significant effect that acquisitions, divestitures and the Recapitalization have had on such statements. See Notes 3 and 4 of Notes to Consolidated Financial Statements. (2) Includes an increase in insurance expense in the second half of 1996 due to a change in estimate of $2.1 million. (3) Pro forma net income (loss) per share applicable to common shareholders is computed using the weighted average number of shares of Common Stock outstanding during the period, including dilutive common equivalent shares from stock options and warrants (using the treasury stock method). The 7,280,020 common shares issued in the Recapitalization and the Merger in December 1996 have been included in the pro forma calculation as if the Recapitalization and the Merger had occurred as of the first day of 1996. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, all other Common Stock issued, and Common Stock options and warrants granted, by the Company at prices below the initial public offering price during the twelve-month period prior to the initial public offering have been included in the calculation as if they were outstanding for the full fiscal year (using the treasury stock method). Historical net income (loss) per share has not been presented since the historical capitalization of the Company is not meaningful due to the significant change in the capital structure of the Company resulting from the Recapitalization. (4) "EBITDAR" is defined to mean earnings before interest, taxes, depreciation, amortization, rentals and leases, cumulative effect of change in accounting method, costs of Recapitalization, loss (gain) on sale of assets, and income (loss) from discontinued operations, net of taxes. EBITDAR has been adjusted in 1996 to exclude the increase in insurance expense due to a change in estimate of $2.1 million. Investors should consider cash flow in evaluating financial performance. Cash flow trends may not mirror EBITDAR trends. The items excluded from EBITDAR are significant components in understanding and assessing the Company's financial performance. The Company has included EBITDAR data because such data are one measure in determining the enterprise value of the Company. EBITDAR reflects the operating results of the Company from a cash perspective. The Company believes discussion of EBITDAR provides meaningful information to the reader of the financial statements and allows investors to better determine the ability of the Company to meet its future debt service, capital expenditure, and working capital requirements and to incur additional indebtedness. By including rentals and leases expense in the definition of EBITDAR, the results are comparable to those results which would be obtained if the Company had chosen to purchase, rather than lease, assets. The choice to purchase assets would have resulted in depreciation expense, a noncash item. EBITDAR is not a measure of financial performance under generally accepted accounting principles and should not be considered an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. The Company's computations of EBITDAR may not be comparable to other similarly titled measures of other companies. (5) EBITDAR margin represents EBITDAR divided by net operating revenue. Investors should consider cash flow in evaluating financial performance. Cash flow trends may not mirror EBITDAR trends. The items excluded from EBITDAR Margin are significant components in understanding and assessing the Company's financial performance. The Company believes discussion of EBITDAR Margin is meaningful to the reader of the financial statements to provide information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. The Company's computations of EBITDAR Margin may not be comparable to other similarly titled measures of other companies. 22 24 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On February 1, 1996, the Company acquired Parkview Regional Hospital from Parkview Regional Hospital, Inc. (a not-for-profit organization). On July 26, 1996, the Company acquired Memorial Mother Frances Hospital from Memorial Hospital Foundation of Palestine, Inc. On November 1, 1996, the Company acquired Starke Memorial Hospital from Starke County, Indiana. The following unaudited pro forma condensed consolidated balance sheet as of June 30, 1997 gives effect to: (i) the sale in July 1997 of 3,755 shares of Junior Preferred Stock and 958,225 shares of Common Stock; (ii) the payment in July 1997 of $211,200 on the note receivable for Common Stock; (iii) Leeway & Co.'s exercise in September 1997 of its warrant to purchase 343,265 shares of Common Stock; (iv) the conversion from no par value to $0.01 par value Common Stock in connection with the Reincorporation; (v) the Preferred Stock Conversion; and (vi) the sale of the Common Stock in the offering and the application of the estimated net proceeds thereof to the repurchase of certain shares of Common Stock, the redemption of Senior Preferred Stock and the repayment of debt, as described in "Use of Proceeds," as if all such transactions had been completed as of June 30, 1997 and assuming an initial public offering price of $14.00 per share. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 1996 and the six months ended June 30, 1997, give effect to: (i) the operating results of the 1996 Acquired Hospitals for periods prior to their acquisition; (ii) the sale in July 1997 of 3,755 shares of Junior Preferred Stock and 958,225 shares of Common Stock; (iii) Leeway & Co.'s exercise in September 1997 of its warrant to purchase 343,265 shares of Common Stock; (iv) the Preferred Stock Conversion; and (v) the sale of the Common Stock in the offering and the application of the estimated net proceeds thereof to the repurchase of certain shares of Common Stock, the redemption of Senior Preferred Stock and the repayment of debt, as described in "Use of Proceeds," as if all such transactions had been completed as of January 1, 1996 and assuming an initial public offering price of $14.00 per share. The pro forma condensed consolidated financial information presented herein does not purport to represent what the Company's results of operations or financial position would have been had such transactions in fact occurred at the beginning of the periods presented or to project the Company's results of operations in any future period. The pro forma result of operations, which do not take into account certain operational changes instituted by the Company upon acquisition of its hospitals, are not necessarily indicative of the results that may be expected from such hospitals. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the audited financial statements, including the notes thereto, included elsewhere in this Prospectus. 23 25 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET JUNE 30, 1997 (IN THOUSANDS)
PRE-OFFERING PRE-OFFERING OFFERING PRO FORMA PRO FORMA PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS(1) CONSOLIDATED ADJUSTMENTS(2) CONSOLIDATED ---------- -------------- ------------ -------------- ------------ ASSETS Current assets Cash and cash equivalents........ $ 6,016 $ 4,182(a) $ 73,014(g) 211(b) (14,482)(h) 15(c) (21,900)(i) $ 10,424 (36,632)(j) $ 10,424 Accounts receivable, less allowance for doubtful accounts....................... 28,292 28,292 28,292 Other current assets............. 10,477 10,477 10,477 -------- ------- -------- -------- -------- Total current assets...... 44,785 4,408 49,193 -- 49,193 Property, plant and equipment, net.............................. 39,066 39,066 39,066 Unallocated purchase price......... 6,822 6,822 6,822 Other assets....................... 6,180 6,180 6,180 -------- ------- -------- -------- -------- Total assets.............. $ 96,853 $ 4,408 $101,261 $ -- $101,261 ======== ======= ======== ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY Current liabilities Accounts payable................. $ 7,982 $ 7,982 $ 7,982 Accrued salaries and benefits.... 5,085 5,085 5,085 Accrued expenses................. 5,451 5,451 5,451 Current maturities of long-term obligations.................... 1,640 1,640 1,640 -------- ------- -------- -------- -------- Total current liabilities............. 20,158 -- 20,158 -- 20,158 Long-term obligations, less current maturities....................... 78,436 78,436 $(36,632)(j) 41,804 Third-party settlements............ 5,984 5,984 5,984 Other liabilities.................. 6,243 $ 1,479(d) (1,900)(i) (2,022)(e) 5,700 3,800 -------- ------- -------- -------- -------- 90,663 (543) 90,120 (38,532) 51,588 Mandatory redeemable preferred stock............................ Senior preferred stock......... 19,018 19,018 (19,018)(i) -- Junior preferred stock......... 27,322 3,755(a) (31,077)(e) -- -- -------- ------- -------- -------- -------- 46,340 (27,322) 19,018 (19,018) -- Common stockholders' equity (deficit) Common stock..................... 3,276 427(a) 57(g) 154(c) (10)(h) (3,772)(f) 25(e) 110 157 Additional paid-in-capital....... -- 3,772(f) 72,957(g) 33,074(e) (14,472)(h) 36,846 (982)(i) 94,349 Notes receivable for common stock.......................... (391) 211(b) (180) (180) Common stock warrant............. 139 (139)(c) -- -- Retained earnings (deficit)...... (63,332) (1,479)(d) (64,811) (64,811) -------- ------- -------- -------- -------- (60,308) 32,273 (28,035) 57,550 29,515 -------- ------- -------- -------- -------- $ 96,853 $ 4,408 $101,261 $ -- $101,261 ======== ======= ======== ======== ========
See accompanying notes to unaudited pro forma condensed consolidated balance sheet. - --------------- (1) Reflects the effects of equity transactions occurring prior to or simultaneously with the closing of the sale of Common Stock in the offering. (2) Reflects the effects of the sale of the Common Stock in the offering and the application of the estimated net proceeds thereof. 24 26 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS) (a) Reflects the sale in July 1997 of 3,755 shares of Junior Preferred Stock and 958,225 shares of Common Stock for cash proceeds of $4,182 as follows: Common Stock....................................... $ 427 Junior Preferred Stock............................. 3,755 -------- Cash proceeds...................................... $ 4,182 ======== (b) Reflects the payment in July 1997 of $211 on the notes receivable for Common Stock. (c) Reflects Leeway & Co.'s exercise in September 1997 of its warrant to purchase 343,265 shares of Common Stock for cash proceeds of $15 as follows: Common Stock....................................... $ 154 Common Stock warrant............................... (139) -------- Cash proceeds...................................... $ 15 ======== (d) Reflects the accrual of $1,479 of dividends on the Senior Preferred Stock and Junior Preferred Stock for the period from July 1, 1997 to the anticipated closing date of the offering. (e) Reflects the conversion of 32,295 shares of Junior Preferred Stock with a liquidation value of $32,295 net of issuance costs of $1,218 and estimated accumulated and unpaid dividends of $2,022 into 2,451,218 shares of Common Stock as follows (at an assumed offering price of $14.00 per share): Accumulated and unpaid dividends................... $ (2,022) Junior Preferred Stock............................. (31,077) Common Stock....................................... 25 Additional paid-in-capital......................... 33,074 -------- $ -- ======== (f) Reflects the reclassification of $3,772 from Common Stock to additional paid-in-capital upon conversion from no par to $0.01 par value Common Stock in connection with the Reincorporation. (g) Reflects the sale of 5,700,000 shares of Common Stock in the offering at an assumed offering price of $14.00 per share, for net proceeds of $73,014 as follows: Common Stock....................................... $ 57 Additional paid-in-capital......................... 72,957 -------- Cash proceeds...................................... $ 73,014 ======== (h) Reflects the repurchase of 1,034,414 shares of Common Stock issued with respect to the conversion of 13,636 of the shares of Junior Preferred Stock held by GTCR Fund IV and Leeway & Co. using offering proceeds of $14,482 as follows: Common Stock....................................... $ (10) Additional paid-in-capital......................... (14,472) -------- Cash disbursed..................................... $(14,482) ======== (i) Reflects the redemption of 20,000 shares of Senior Preferred Stock with a liquidation value of $20,000 net of issuance and warrant costs of $982 and the payment of estimated accumulated and unpaid dividends of $1,900 using offering proceeds of $21,900 as follows: Accumulated and unpaid dividends................... $ (1,900) Senior Preferred Stock............................. (19,018) Additional paid-in-capital......................... (982) -------- Cash disbursed..................................... $(21,900) ======== (j) Reflects the application of the remaining proceeds from the offering of $36,632 for the repayment of long-term obligations.
25 27 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA ADJUSTMENTS --------------------- ----------------------- 1996 1996 ACQUIRED ACQUIRED PRO FORMA COMPANY HOSPITALS HOSPITALS OFFERING CONSOLIDATED --------- --------- --------- -------- ------------ Net operating revenue............ $ 129,855 $ 23,281 $153,136 Operating expenses............... 128,689 23,008 $ (375)(a) 151,322 Interest expense................. 2,523 3,031 (44)(b) $(121)(d) 5,389 Costs of recapitalization........ 11,570 11,570 Loss on sale of assets........... 442 442 --------- -------- ------- ----- -------- Loss from continuing operations before income taxes............ (13,369) (2,758) 419 121 (15,587) Income tax benefit............... (4,464) -- (912)(c) 48(c) (5,328) --------- -------- ------- ----- -------- Loss from continuing operations..................... (8,905) (2,758) 1,331 73 (10,259) --------- -------- ------- ----- -------- Preferred stock dividends and accretion...................... (172) -- 172(e) -- --------- -------- ------- ----- -------- Loss from continuing operations applicable to common shares.... $ (9,077) $ (2,758) $ 1,331 $ 245 $(10,259) ========= ======== ======= ===== ======== Loss per common share: Primary and fully diluted...... $ (0.64) ======== Weighted average shares used in earnings per share computation: Primary and fully diluted...... 15,959
See accompanying notes to unaudited pro forma condensed consolidated statements of operations. 26 28 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA OFFERING PRO FORMA HISTORICAL ADJUSTMENTS CONSOLIDATED ---------- ----------- ------------ Net operating revenue................................ $80,861 $80,861 Operating expenses................................... 71,599 71,599 Interest expense..................................... 3,941 $(1,482)(d) 2,459 Gain on sale of assets............................... (159) (159) ------- ------- ------- Income from continuing operations before income taxes.............................................. 5,480 1,482 6,962 Provision for income taxes........................... 2,081 578(c) 2,659 ------- ------- ------- Income from continuing operations.................... 3,399 904 4,303 ------- ------- ------- Preferred stock dividends and accretion.............. (2,384) 2,384(e) -- ------- ------- ------- Income from continuing operations applicable to common shares...................................... $ 1,015 $ 3,288 $ 4,303 ======= ======= ======= Income per common share: Primary and fully diluted.......................... $ 0.27 ======= Weighted average shares used in earnings per share computation: Primary and fully diluted.......................... 15,959
See accompanying notes to unaudited pro forma condensed consolidated statements of operations. 27 29 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) - --------------- (a) Reflects the elimination of the historical depreciation expense of the 1996 Acquired Hospitals and the inclusion of the Company's depreciation expense. (b) Reflects the elimination of the historical interest expense related to debt of the 1996 Acquired Hospitals not assumed in the acquisitions, and the inclusion of the Company's interest expense related to debt used to finance the acquisitions. (c) Reflects the inclusion of income tax expense (benefit) based on the combined federal and state statutory rate of 39% applied to adjusted pre-tax income or loss. (d) Reflects the elimination of the interest expense associated with the $36,632 of long-term obligations to be repaid with the net proceeds of the offering. (e) Reflects the elimination of the dividends and the accretion of issuance costs on the Senior Preferred Stock to be redeemed with a portion of the net proceeds of the offering and Junior Preferred Stock to be converted into Common Stock in connection with the offering. 28 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Company's consolidated financial statements and related notes thereto included elsewhere in this Prospectus. OVERVIEW Province Healthcare Company is a health care services company focused on acquiring and operating hospitals in attractive non-urban markets in the United States. The Company currently operates eight general acute care hospitals in four states with a total of 570 licensed beds, and manages 50 hospitals in 17 states with a total of 3,448 licensed beds. Prior to the Recapitalization and the Merger with PHC, the Company operated under the name Brim, Inc. The current operations of the Company include certain Brim operations and all of the operations of PHC. Prior to the Recapitalization, Brim operated primarily through two divisions: the Health Care Group, which primarily managed and leased hospitals, and the Senior Living Group, which was responsible for Brim's assisted living facilities. In February 1996, Brim acquired Parkview Regional Hospital in Mexia, Texas ("Parkview"). PHC was founded in February 1996 by GTCR Fund IV and Martin S. Rash to acquire and operate hospitals in attractive non-urban markets. PHC acquired its first hospital, Memorial Mother Frances Hospital in Palestine, Texas ("Memorial Mother Frances"), in July 1996 and acquired another hospital, Starke Memorial Hospital in Knox, Indiana ("Starke Memorial"), in October 1996. In December 1996, Brim sold its Senior Living Group and Brim was recapitalized. The operations of Brim and PHC were subsequently combined in the Merger. See "The Recapitalization and The Merger." An integral part of the Company's strategy is to acquire non-urban acute care hospitals. See "Business -- Business Strategy." Because of the financial impact of the Company's recent acquisitions and divestitures, it is difficult to make meaningful comparisons between the Company's financial statements for the fiscal periods presented. In addition, due to the relatively small number of owned and leased hospitals, each hospital acquisition can materially affect the overall operating margin of the Company. Upon the acquisition of a hospital, the Company typically takes a number of steps to lower operating costs. See "Business -- Hospital Operations." The impact of such actions may be offset by cost increases to expand services, strengthen medical staff and improve market position. The benefits of these investments and of other activities to improve operating margins generally do not occur immediately. Consequently, the financial performance of a newly-acquired hospital may adversely affect overall operating margins in the near term. As the Company makes additional hospital acquisitions, the Company expects that this effect will be mitigated by the expanded financial base of existing hospitals and the allocation of corporate overhead among a larger number of hospitals. RECAPITALIZATION AND MERGER The basic elements of the December 1996 recapitalization of the Company included the following: GTCR Fund IV and other investors purchased new shares of the Company's common and preferred stock. The Company sold its senior living business and entered into a new credit facility to, along with the proceeds from the sale of the new shares, provide financing for the redemption of a portion of the pre-existing common and preferred stock; this pre-existing common and preferred stock was redeemed; and certain pre-existing debt was repaid. The recapitalization was accounted for as such and, accordingly, did not result in a new basis of accounting. Upon completion of the recapitalization, GTCR Fund IV controlled the Company and also controlled PHC, a company unrelated to Brim that GTCR Fund IV founded in February 1996. Since both companies are engaged in the business of owning, leasing and managing hospitals in non-urban communities, GTCR Fund IV then merged PHC into Brim so that the two companies would be under the same corporate structure and management. 29 31 Pursuant to the Recapitalization: (i) each of the Investors purchased shares of the Common Stock and Junior Preferred Stock; (ii) Leeway & Co. also purchased shares of Senior Preferred Stock and a warrant to purchase additional shares of Common Stock; (iii) the Company's current Board of Directors and senior management were elected; (iv) Brim repaid its existing indebtedness and entered into the Credit Agreement; and (v) the Company redeemed stock held by the Redeemed Stockholders and settled outstanding Brim stock options. In connection with the Recapitalization, an aggregate of $11.6 million was charged to operations, consisting of $8.0 million paid to settle Brim stock options, $2.2 million of severance payments, and $1.4 million of transaction-related costs (principally professional fees). See "The Recapitalization and The Merger." Following the Recapitalization, a subsidiary of Brim was merged into PHC, such that PHC became a subsidiary of the Company. Pursuant to the Merger, the stockholders of PHC received an aggregate of 14,403 shares of Junior Preferred Stock and 3,738,556 shares of Common Stock, and PHC's existing indebtedness of $19.6 million was repaid. ACQUISITIONS AND DIVESTITURES In February 1995, Brim acquired two senior living residences for $15.8 million. In September 1995, Brim sold the real property of the two facilities and leased them back under an operating lease agreement for a minimum lease term of 15 years. In May 1995, Brim sold Fifth Avenue Hospital, located in Seattle, Washington, for $6.0 million and recorded a pre-tax gain on this transaction of $2.5 million. In February 1996, Brim acquired Parkview by entering into a 15-year operating lease agreement with two five-year renewal terms, and by purchasing certain assets and assuming certain liabilities for a purchase price of $1.8 million. In July 1996, PHC purchased certain assets and assumed certain liabilities of Memorial Mother Frances for a purchase price of $23.2 million in a transaction resulting in PHC owning 95.0% of the hospital. In October 1996, PHC acquired Starke Memorial by assuming certain liabilities and entering into a capital lease agreement, and by purchasing certain net assets for a purchase price of $7.7 million. In August 1997, the Company acquired Needles Desert Community Hospital ("Needles") by assuming certain liabilities and entering into an operating lease agreement, and by purchasing certain net assets for a purchase price of $1.3 million. All of the foregoing acquisitions were accounted for as purchases. DISCONTINUED OPERATIONS During the past three years, Brim discontinued certain operations. In May 1995, Brim discontinued its business of providing managed care administration and practice management services to physician groups, reporting an after-tax loss of $0.7 million on the disposal. In September 1995, Brim disposed of its stand-alone business of providing surgery on an outpatient basis for a loss of $0.4 million, net of taxes. In December 1996, immediately prior to the Recapitalization, Brim sold its senior living business for a gain of $5.5 million, net of taxes. The net results of operations of these businesses are included in "Discontinued Operations" in the 1994, 1995 and 1996 consolidated financial statements. 30 32 RESULTS OF OPERATIONS The following table presents, for the periods indicated, information expressed as a percentage of net operating revenue. Such information has been derived from the consolidated statements of operations of the Company included elsewhere in this Prospectus.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, ----------------------- -------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net patient service revenue................... 76.5% 75.0% 80.3% 74.5% 86.1% Management and professional services revenue..................................... 15.7 19.3 14.6 16.5 10.4 Other revenue................................. 7.8 5.7 5.1 9.0 3.5 ----- ----- ----- ----- ----- Net operating revenue......................... 100.0% 100.0% 100.0% 100.0% 100.0% Expenses: Salaries, wages and benefits................ 52.6 54.6 50.6 49.4 41.8 Purchased services.......................... 16.5 14.2 15.0 14.6 12.8 Supplies.................................... 10.8 10.0 10.1 9.0 9.7 Provision for doubtful accounts............. 5.0 4.5 7.4 4.8 7.3 Other operating expenses.................... 4.8 7.6 9.8 8.0 10.4 Rentals and leases.......................... 3.7 4.1 4.0 4.4 3.6 Depreciation and amortization............... 1.5 1.7 2.2 1.5 3.1 Interest expense............................ 0.7 0.6 1.9 1.5 4.9 Costs of recapitalization................... -- -- 8.9 -- -- Loss (gain) on sale of assets............... (0.6) (2.8) 0.3 0.2 (0.2) ----- ----- ----- ----- ----- Income (loss) from continuing operations before provision for income taxes........... 5.0% 5.3% (10.3)% 6.6% 6.8% Income (loss) from continuing operations...... 2.9% 3.4% (6.9)% 3.5% 4.2% Net income (loss)............................. 2.8% 3.1% (2.2)% 3.8% 4.2%
Hospital revenues are received primarily from Medicare, Medicaid and commercial insurance. The percentage of revenues received from the Medicare program is expected to increase due to the general aging of the population. The payment rates under the Medicare program for inpatients are based on a prospective payment system ("PPS"), based upon the diagnosis of a patient. While these rates are indexed for inflation annually, the increases have historically been less than actual inflation. In addition, states, insurance companies and employers are actively negotiating the amounts paid to hospitals as opposed to their standard rates. The trend toward managed care, including health maintenance organizations, preferred provider organizations and various other forms of managed care, may affect the hospitals' ability to maintain their current rate of net revenue growth. Net operating revenue is comprised of: (i) net patient service revenue from the Company's owned and leased hospitals; (ii) management and professional services revenue; and (iii) other revenue. Net patient service revenue for the owned and leased hospitals is reported net of contractual adjustments and policy discounts of $52.1 million, $57.4 and $77.0 million for the years ended December 31, 1994, 1995 and 1996, respectively; and $32.9 million and $51.5 million for the six months ended June 30, 1996 and 1997, respectively. The adjustments principally result from differences between the hospitals' customary charges and payment rates under the Medicare and Medicaid programs. Customary charges have generally increased at a faster rate than the rate of increase for Medicare and Medicaid payments. Operating expenses of the hospitals primarily consist of salaries and benefits, purchased services, supplies, provision for doubtful accounts and other operating expenses (principally consisting of utilities, insurance, property taxes, travel, freight, postage, telephone, advertising, repairs and maintenance). 31 33 Management and professional services revenue is comprised of fees from management and professional consulting services provided to third-party hospitals pursuant to management contracts and consulting arrangements, plus reimbursable expenses. Operating expenses for the management and professional services business primarily consist of salaries and benefits and reimbursable expenses. Other revenue includes interest income and other miscellaneous revenue. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 Net operating revenue was $80.9 million in 1997, compared to $58.3 million in 1996, an increase of $22.6 million, or 38.8%. Net patient service revenue totaled $69.6 million in 1997, compared to $43.4 million in 1996, an increase of $26.2 million, or 60.4%. This increase is principally the result of the 1996 Acquisitions. Memorial Mother Frances and Starke Memorial net patient revenue for 1997 totaled $22.1 million. The 1996 results reflect five months operations of Parkview, while the 1997 results reflect six months. This accounts for $0.9 million of the increase. The remaining $3.2 million increase is attributable to increased patient volumes, new patient services and increased customary charges at the Company's four other hospitals. On a same hospital basis, net patient service revenue increased by 5.6% to $41.9 million. Management and professional services revenue totaled $8.4 million in 1997, compared to $9.6 million in 1996, a decrease of $1.2 million, or 12.5%. This decrease results primarily from a decrease in rebilled salaries (which represents salaries of certain hospital executives whose salaries are billed to the hospitals for reimbursement) of $1.0 million in 1996. The remaining decrease of $0.2 million results from a decline in consulting fees at the managed hospitals. Other revenue totaled $2.9 million in 1997, compared to $5.3 million in 1996, a decrease of $2.4 million, or 45.3%. Of this decrease, $1.0 million relates to a fee received in 1996 in connection with a failed merger. The remaining $1.4 million decrease relates to a decline in miscellaneous other revenues. Salaries, wages and benefits totaled $33.8 million in 1997, compared to $28.8 million in 1996, an increase of $5.0 million, or 17.4%. The 1996 Acquisitions resulted in an increase of $8.0 million. This increase was partially offset by a reduction in the number of employees, which resulted in a decrease of $3.0 million. Purchased services expense totaled $10.3 million in 1997, compared to $8.5 million in 1996, an increase of $1.8 million, or 21.2%. The 1996 Acquisitions resulted in an increase of $2.8 million. This increase was partially offset by a reduction of $1.0 million in expense on a same hospital basis. Supplies expense totaled $7.8 million in 1997 compared to $5.3 million in 1996, an increase of $2.5 million, or 47.2%. The 1996 Acquisitions resulted in an increase of $2.3 million. The remaining $0.2 million relates to an increase in patient volumes in 1997. Provision for doubtful accounts totaled $5.9 million in 1997, compared to $2.8 million in 1996, an increase of $3.1 million, or 110.7%. The 1996 Acquisitions resulted in an increase of $2.6 million. The provision increased $0.9 million on a same hospital basis. The provision at the management company decreased $0.5 million as a result of recoveries in 1997 on previously written off accounts. Other operating expenses totaled $8.4 million in 1997, compared to $4.7 million in 1996, an increase of $3.7 million, or 78.7%. The 1996 Acquisitions resulted in an increase of $2.5 million. On a same hospital basis, other operating expenses increased $0.3 million in correlation to the increased net patient services revenue at these hospitals. The remaining increase of $0.9 million relates to increased acquisition activity and increased corporate operations expenses. 32 34 EBITDAR totaled $14.6 million in 1997, compared to $8.3 million in 1996, an increase of $6.3 million, or 75.9%. While EBITDAR should not be considered in isolation or construed as a substitute for net income or a better indicator of liquidity than cash flow from operating activities, which are determined in accordance with generally accepted accounting principles, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. Rentals and leases totaled $2.9 million in 1997, compared to $2.6 million in 1996, an increase of $0.3 million, or 11.5%. The 1996 Acquisitions resulted in an increase of $0.2 million. The remaining $0.1 million increase relates to increases on a same hospital basis. Depreciation and amortization totaled $2.5 million in 1997, compared to $0.9 million in 1996, an increase of $1.6 million, or 177.8%. The 1996 Acquisitions resulted in an increase of $1.4 million. The remaining $0.2 million increase relates to increases as a result of increases in property, plant and equipment on a same hospital basis. Interest expense totaled $3.9 million in 1997, compared to $0.8 million in 1996, an increase of $3.1 million, or 387.5%. This increase resulted primarily from $72.0 million of new bank debt incurred in connection with the Recapitalization. The Company recorded a gain on sale of assets of $0.2 million in 1997, compared to a loss of $0.1 million in 1996. The gain in 1997 relates primarily to the sale of the remaining assets of Fifth Avenue Hospital. The loss in 1996 related to the sale of assets in the normal course of business. The net result of the above was that the Company recorded net income from operations of $3.4 million for the six months ended June 30, 1997, compared to $2.2 million in 1996, an increase of $1.2 million, or 54.5%. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Net operating revenue was $129.9 million in 1996, compared to $101.2 million in 1995, an increase of $28.7 million, or 28.4%. Net patient service revenue totaled $104.3 million in 1996, compared to $75.9 million in 1995, an increase of $28.4 million, or 37.4%. This increase is principally the result of the 1996 Acquisitions which provide combined 1996 net patient service revenue of $22.3 million. The 1996 amounts include eleven months of revenue for Parkview, five months of revenue for Memorial Mother Frances, and three months of revenue for Starke Memorial. The remaining $6.1 million increase is attributable to increased patient volumes, new patient services and increased customary charges at the Company's four other hospitals. On a same hospital basis, net patient service revenue increased by 7.1% to $79.4 million. Management and professional services revenue totaled $18.9 million in 1996, compared to $19.6 million in 1995, a decrease of $0.7 million, or 3.6%. The decrease is principally the result of a decline in consulting fees at the managed hospitals. Other revenue totaled $6.6 million in 1996, compared to $5.8 million in 1995, an increase of $0.8 million, or 13.8%. This increase is principally attributable to a $1.0 million fee received in 1996 relating to a failed merger. Salaries, wages and benefits expenses totaled $65.7 million in 1996, compared to $55.3 million in 1995, an increase of $10.4 million, or 18.8%. The 1996 Acquisitions accounted for $8.9 million of this increase. Salaries, wages and benefits increased $1.5 million on a same hospital basis, primarily as a result of increases in rates of pay. Purchased services expense totaled $19.5 million in 1996, compared to $14.4 million in 1995, an increase of $5.1 million, or 35.4%. The 1996 Acquisitions accounted for $4.2 million of this increase. Also, purchased services increased $0.9 million on a same hospital basis, primarily as a 33 35 result of increased professional fees at the corporate level related to merger and acquisition activity and increased use of contract labor. Supplies expense totaled $13.1 million in 1996, compared to $10.1 million in 1995, an increase of $3.0 million, or 29.7%. The 1996 Acquisitions accounted for $2.7 million of this increase. The remaining $0.3 million increase was due to increased patient volumes and new patient services. Provision for doubtful accounts totaled $9.6 million in 1996, compared to $4.6 million in 1995, an increase of $5.0 million, or 108.7%. The 1996 Acquisitions accounted for $2.4 million of this increase. The provision increased $2.6 million on a same hospital basis as a result of a change in estimate. During the year ended December 31, 1996, the Company changed the methodologies used by the separate entities to calculate the allowance for doubtful accounts to conform to a single method, which resulted in an unfavorable impact on the provision for doubtful accounts in 1996. Other operating expenses totaled $12.8 million in 1996, compared to $7.7 million in 1995, an increase of $5.1 million, or 66.2%. The 1996 Acquisitions accounted for $1.3 million of this increase. Insurance expense increased $2.1 million as a result of a change in estimate of incurred but not reported claims related to professional liability and workers' compensation insurance. In 1996, an actuarial calculation was made, resulting in a change in estimate. The actuarial calculation was based on available loss run information for each facility and supplemented with industry data. Prior to 1996, the Company was unable to make a reasonable estimate of a liability based on the lack of available information, e.g., loss runs and statistics. The remaining increase of $1.7 million resulted from increased costs on a same hospital basis, in correlation to the increased net patient services revenue at these hospitals, and increased acquisition activity. EBITDAR, as adjusted to exclude the increase in insurance expense in 1996 due to a change in estimate of $2.1 million, totaled $11.3 million in 1996, compared to $9.0 million in 1995, an increase of $2.3 million, or 25.6%. This increase relates principally to increased patient service revenue. Rentals and leases totaled $5.2 million in 1996, compared to $4.1 million in 1995, an increase of $1.1 million, or 26.8%. Of this increase, $0.5 million resulted from the 1996 Acquisitions. The remaining increase resulted from scheduled rent increases in the long-term facilities leases at the other hospitals of $0.2 million, and increases in other lease and rental obligations of $0.4 million. Depreciation and amortization totaled $2.8 million in 1996, compared to $1.8 million in 1995, an increase of $1.0 million, or 55.6%. This increase resulted from the 1996 Acquisitions. Interest expense totaled $2.5 million in 1996, compared to $0.6 million in 1995, an increase of $1.9 million, or 316.7%. This increase resulted primarily from new borrowings to finance the 1996 Acquisitions. In July 1996, the Company borrowed $13.7 million to finance the acquisition of Memorial Mother Frances, and in October 1996 borrowed an additional $5.6 million to finance the acquisition of Starke Memorial. Following the Recapitalization and the Merger in December 1996, the $19.3 million noted above was refinanced with a portion of the borrowings of $72.0 million under the Credit Agreement. The interest rates on this debt ranged from 8.1% to 9.3% during 1996. The remaining increase relates to increased interest rates on variable-rate debt, the balance ($5.3 million) of which was paid in full following the Merger in December 1996. Interest rates on this debt ranged from 7.0% to 10.0% during 1996. See "-- Liquidity and Capital Resources." Recapitalization expense totaled $11.6 million in 1996. This expense consisted of $8.0 million paid to settle options, $2.2 million of severance payments, and $1.4 million of transaction-related costs (principally professional fees). The Company recorded a loss on sale of assets of $0.4 million in 1996, compared to a gain of $2.8 million in 1995. The 1996 loss related to the sale of certain assets in connection with the Recapitalization. The gain in 1995 resulted from the sale of Fifth Avenue Hospital in May 1995. 34 36 The net result of the above was that the Company recorded a loss from continuing operations before provision for income taxes of $13.4 million in 1996, compared to income from continuing operations of $5.4 million in 1995, a decrease of $18.8 million, or 348.1%. The Company recognized an income tax benefit of $4.5 million in 1996, as a result of the $13.4 million loss from continuing operations (33.4% effective rate), compared to tax expense of $2.0 million in 1995 on income of $5.4 million (36.4% effective rate). The benefit in 1996 resulted in an increase in deferred tax assets to a balance of $6.4 million at December 31, 1996. Management believes it is more likely than not that the deferred tax assets will ultimately be realized through future taxable income from operations. Income from discontinued operations, net of income taxes, in 1996 was $0.5 million, compared to $0.8 million in 1995. The income is the result of income from the operations of the senior living business, which was sold in December 1996. Gain on disposal of discontinued operations, net of income taxes, in 1996 was $5.5 million, compared to a loss of $1.0 million in 1995. The 1996 gain is related to the sale of the senior living business. The 1995 loss resulted from the loss on the sale of the Company's managed care and outpatient surgery business, which was discontinued in September 1995. The net result of the above was that the Company recorded a net loss in 1996 of $2.9 million, compared to net income of $3.1 million in 1995, a decrease of $6.0 million, or 193.5%. Pro forma net loss per share was $0.35 in 1996. The loss per share for the year ended December 31, 1996 is computed using the weighted average number of shares of Common Stock outstanding during the period, including dilutive common equivalent shares from stock options and warrants. The 7,280,020 shares of Common Stock issued pursuant to the Recapitalization and the Merger have been included in the pro forma calculations as if such transactions had occurred as of the first day of 1996. All other Common Stock and common equivalent shares issued by the Company at prices below the initial public offering price during the twelve-month period prior to the public offering have been included in the calculation as if they were outstanding for the full fiscal year (treasury stock method). Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Net operating revenue was $101.2 million in 1995, compared to $102.1 million in 1994, a decrease of $0.9 million, or less than 1.0%. Net patient service revenue totaled $75.9 million in 1995, compared to $78.1 million in 1994, a decrease of $2.2 million, or 2.8%, primarily due to the sale of Fifth Avenue Hospital in May 1995. On a same hospital basis, net patient service revenue increased by 1.4% to $74.1 million. Management and professional services revenue totaled $19.6 million in 1995, compared to $16.0 million in 1994, an increase of $3.6 million, or 22.5%. This increase resulted primarily from an increase in consulting fees on special projects. Other revenue was $5.8 million in 1995, compared to $8.0 million in 1994, a decrease of $2.2 million, or 27.5%. This decrease is the result of a decrease in miscellaneous revenues at the hospitals of $0.9 million, primarily as a result of the sale of Fifth Avenue Hospital $(0.5 million) in May 1995. Another $1.3 million related to decreased revenue at a subsidiary which invested in outpatient surgery centers, and a decrease in other miscellaneous revenue. Salaries, wages and benefits expenses totaled $55.3 million in 1995 compared to $53.7 million in 1994, an increase of $1.6 million, or 3.0%. This increase is principally the result of increased rates of pay. Purchased services expense totaled $14.4 million in 1995, compared to $16.9 million in 1994, a decrease of $2.5 million, or 14.8%. This decrease is principally the result of the sale of Fifth Avenue Hospital. 35 37 Supplies expense totaled $10.1 million in 1995, compared to $11.0 million in 1994, a decrease of $0.9 million, or 8.2%. This decrease is principally the result of decreased patient services revenue as a result of the sale of Fifth Avenue Hospital. Provision for doubtful accounts totaled $4.6 million in 1995, compared to $5.1 million in 1994, a decrease of $0.5 million, or 9.8%. This decrease is the result of decreased patient service revenue in 1995 and the sale of Fifth Avenue Hospital. Other operating expenses totaled $7.7 million in 1995, compared to $4.9 million in 1994, an increase of $2.8 million, or 57.1%. This increase is principally the result of increased operating expense at the hospitals of $1.8 million, $0.5 million at the management company, and $0.5 million related to merger activity in 1995. EBITDAR totaled $9.0 million in 1995, compared to $10.5 million in 1994, a decrease of $1.5 million, or 14.3%. This decrease is primarily due to the net result of an increase in salaries and benefits, a decrease in purchased services, a decrease in supplies, and a decrease in provision for doubtful accounts. Rentals and leases totaled $4.1 million in 1995, compared to $3.8 million in 1994, an increase of $0.3 million, or 7.9%. This increase is the result of scheduled rent increases in the long-term facilities leases at the hospitals of $0.1 million and increases in other lease and rental obligations of $0.2 million. Depreciation and amortization totaled $1.8 million in 1995, compared to $1.5 million in 1994, an increase of $0.3 million, or 20.0%, which is primarily attributable to increases in property and equipment. Interest expense totaled $0.6 million in 1995, compared to $0.8 million in 1994, a decrease of $0.2 million, or 25.0%. This decrease resulted primarily from a decrease in average debt balances. The Company recorded a gain on sale of assets in 1995 of $2.8 million, compared to a gain of $0.6 million in 1994. The sale of Fifth Avenue Hospital resulted in $2.5 million of the gain in 1995. The Company recorded income from continuing operations, before provision for income taxes, of $5.4 million in 1995, compared to $5.1 million in 1994, an increase of $0.3 million, or 5.9%. The Company recorded a provision for income taxes of $2.0 million in 1995 (36.4% effective rate), compared to $2.1 million in 1994 (41.3% effective rate). The difference in the effective rates for 1995 and 1994 relates principally to the tax effect of the change in the valuation allowance for deferred tax assets. Income from discontinued operations, net of income taxes, was $0.8 in 1995, compared to a loss of $0.2 in 1994, which is the result of operations of the senior living business sold in 1996. Loss on disposal of discontinued operations, net of income taxes, in 1995 was $1.0 million dollars. The loss resulted from the loss on the sale of the Company's managed care and outpatient surgery business, which was discontinued in September 1995. The net result of the above was that the Company recorded net income of $3.1 million for the year ended December 31, 1995, compared to net income of $2.8 million in 1994, an increase of $0.3 million, or 10.7%. LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997, the Company had working capital of $24.6 million, including cash and cash equivalents of $6.0 million. The ratio of current assets to current liabilities was 2.2 to 1.0 at June 30, 1997, compared to 2.0 to 1.0 at December 31, 1996. As with the hospital industry in general, a major component of the Company's working capital is accounts receivable arising from services provided to patients of its owned and leased hospitals. 36 38 Payments on accounts receivable are made by third-party payors (Medicare, Medicaid, and insurance plans) and directly by the patients. The Company believes that the average collection period for its owned and leased hospitals is consistent with the industry average. Fees for management and professional services are generally paid monthly. The Company's cash requirements, excluding acquisitions, have historically been funded by cash generated from operations. Cash from operations was $2.7 million for the year ended December 31, 1994, $3.7 million for the year ended December 31, 1995, and $1.8 million for the year ended December 31, 1996. The decrease in 1996 is primarily due to the net loss of $2.9 million. Cash provided by (used in) operations was $(1.5 million) for the six months ended June 30, 1997 and $7.4 million for the six months ended June 30, 1996. The Company used cash for investing activities of $0.7 million, $1.5 million, $17.3 million and $5.7 million for the years ended December 31, 1994, 1995 and 1996, and for the six months ended June 30, 1997, respectively. These amounts relate to acquisitions, divestitures of hospitals and purchases and disposals of property, plant and equipment in each period. Cash provided by (used in) financing activities totaled $(2.6 million), $(1.7 million), $24.5 million and $2.0 million for the years ended December 31, 1994, 1995 and 1996, and for the six months ended June 30, 1997, respectively. The 1996 amount results from the proceeds from long-term debt, net of debt refinancing and recapitalization. Capital expenditures for owned and leased hospitals may vary from year to year depending on facility improvements and service enhancements undertaken by the hospitals. Management services activities do not require significant capital expenditures. Capital expenditures for the year ended December 31, 1996 were $14.0 million, which included $1.4 million in connection with the renovation of Colorado Plains Medical Center and $0.6 million in connection with the information system installation at General Hospital. Capital expenditures for the six months ended June 30, 1997 were $5.5 million. The Company expects to make capital expenditures in 1997 of $8.5 million, exclusive of any acquisitions. Planned capital expenditures for 1997 include capital improvements at the Company's owned and leased hospitals $(6.5 million), as well as expenditures for standardizing management information systems for the owned and leased hospitals and the corporate office $(2.0 million). The Company intends to purchase or lease additional acute care hospitals, and is actively seeking such acquisitions. There can be no assurance that the Company will not require additional debt or equity financing for any particular acquisition, or that any needed financing will be available on favorable terms. As part of the Recapitalization, the Company entered into a $100.0 million Credit Agreement in December 1996, with First Union National Bank of North Carolina, as agent for a syndicated group of lenders. The facility consists of a revolving credit facility in an amount of up to $65.0 million and a term loan facility in the amount of $35.0 million. Amounts outstanding under the Credit Agreement at June 30, 1997 and December 31, 1996 were $74.0 million and $72.0 million, respectively, of which $35.0 million relates to the term loan portion of the Credit Agreement. Borrowings under the Credit Agreement bear interest, at the Company's option, at the adjusted base rate or at the adjusted LIBOR rate. Interest ranged from 7.9% to 9.5% during the six-month period ended June 30, 1997, and 8.1% to 9.3% during the year ended December 31, 1996. In March 1997, as required under the Credit Agreement, the Company entered into an interest rate swap agreement, which effectively converted for a three-year period $35.0 million of floating-rate borrowings to fixed-rate borrowings, with a current effective rate of 8.8%. The Company pays a commitment fee of one-half of one percent on the unused portion of the revolving credit facility. The Company may prepay the principal amount outstanding under the Credit Agreement at any time before maturity. The revolving credit facility matures on December 16, 1999. The term loan is payable in quarterly installments ranging from $1.3 million, commencing in the second quarter of 1998, to $2.3 million in 2002, plus one 37 39 payment of $2.0 million in 2002. Borrowings under the revolver for acquisitions require the consent of the lenders. The Credit Agreement contains limitations on the Company's ability to incur additional indebtedness, (including contingent obligations), sell material assets, retire, redeem or otherwise reacquire its capital stock, acquire the capital stock or assets of another business, and pay dividends. The Credit Agreement also requires the Company to maintain a specified net worth and meet or exceed certain coverage, leverage, and indebtedness ratios. Indebtedness under the Credit Agreement is secured by substantially all assets of the Company. Management is discussing with its lenders potential amendments to the Credit Agreement to increase the credit facility to $175.0 million to $200.0 million. There can be no assurances that such amendments will be made. The Company believes that its cash flow from operations, together with borrowings available under the Credit Agreement and the net proceeds of the offering, will be sufficient to fund the Company's operating expenses, capital expenditures and debt service requirements for the foreseeable future. The Company will continue to pursue its acquisition strategy and in connection therewith may pursue additional financings and incur additional indebtedness. INFLATION The health care industry is labor intensive. Wages and other expenses increase, especially during periods of inflation and labor shortages. In addition, suppliers pass along rising costs to the Company in the form of higher prices. The Company has generally been able to offset increases in operating costs by increasing charges for services and expanding services. The Company has also implemented cost control measures to curb increases in operating costs and expenses. In light of cost containment measures imposed by government agencies and private insurance companies, the Company is unable to predict its ability to offset or control future cost increases, or its ability to pass on the increased costs associated with providing health care services to patients with government or managed care payors, unless such payors correspondingly increase reimbursement rates. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 128, Earnings per Share and SFAS No. 129, Disclosure of Information about Capital Structure. These statements are effective for periods ending after December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share. This Statement simplifies the standards for computing earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the statement of operations and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. The adoption of SFAS No. 128 would have had no impact on the calculation of earnings per share assuming the calculation was modified to treat: (i) the 7,280,020 shares issued in the Recapitalization and the Merger in December 1996 as being outstanding for the entire period presented; and (ii) to treat all other Common Stock issued, and Common Stock options and warrants granted, by the Company at prices below the initial public offering price during the twelve-month period prior to the initial public offering as if they were outstanding for the entire period presented. SFAS No. 129 establishes standards for disclosing information about a company's capital structure. The adoption of SFAS No. 129 is not expected to materially alter disclosures presently being provided. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. The Statement establishes standards for the reporting and display of comprehensive income and its components. 38 40 The Statement requires that all items that are income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Statement was only recently issued, and the Company has not yet determined the impact of adoption on its disclosure requirements. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Statement changes the way public companies report segment information in annual financial statements and also requires those companies to report selected segment information in interim financial reports to shareholders. The Statement is effective for financial statements for fiscal years beginning after December 15, 1997. The Statement was only recently issued, and the Company has not yet determined the impact of adoption on its disclosure requirements. FORWARD-LOOKING STATEMENTS Certain statements contained in this discussion, including without limitation, statements containing the words "believes," "anticipates," "intends," "expects," and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in regions where the Company operates; demographic changes; the effect of existing or future governmental regulation and federal and state legislative and enforcement initiatives on the Company's business, including the recently-enacted Balanced Budget Act of 1997; changes in Medicare and Medicaid reimbursement levels; the Company's ability to implement successfully its acquisition and development strategy and changes in such strategy; the availability and terms of financing to fund the expansion of the Company's business, including the acquisition of additional hospitals; the Company's ability to attract and retain qualified management personnel and to recruit and retain physicians and other health care personnel to the non-urban markets it serves; the effect of managed care initiatives on the non-urban markets served by the Company's hospitals and the Company's ability to enter into managed care provider arrangements on acceptable terms; the effect of liability and other claims asserted against the Company; the effect of competition in the markets served by the Company's hospitals; and other factors referenced in this Prospectus. Certain of these factors are discussed in more detail elsewhere in this Prospectus. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. See "Risk Factors." 39 41 BUSINESS OVERVIEW Province Healthcare Company is a provider of health care services in attractive non-urban markets in the United States. In developing a platform for the provision of health care services within target markets, the Company seeks to acquire hospitals which are the sole or primary providers of health care in those communities. After acquiring a hospital, the Company seeks to improve the hospital's operating performance and to broaden the range of services provided to the community. The Company offers a wide range of inpatient and outpatient medical services and also provides specialty services including skilled nursing, geriatric psychiatry and rehabilitation. The Company currently owns or leases eight general acute care hospitals in four states with a total of 570 licensed beds. The Company also provides management services to 50 primarily non-urban hospitals in 17 states with a total of 3,448 licensed beds. For the year ended December 31, 1996, and the six months ended June 30, 1997, the Company had net operating revenue of $129.9 million and $80.9 million, respectively. The Company's objective is to be the leading provider of high quality health care in selected non-urban markets. To achieve this end, the Company seeks to acquire hospitals which are the primary providers of health care in their markets and which present the opportunity to increase profitability and market share. The Company targets acquisition candidates that: (i) have a minimum service area population of 20,000 with a stable or growing employment base; (ii) are the sole or primary providers of health care services in the community; (iii) have annual net patient revenue of at least $12.0 million; and (iv) have financial performance that will benefit from Province management's proven operating skills. The Company's goal is to acquire two to four hospitals each year of the approximately 1,100 non-urban hospitals that fit the Company's acquisition profile. Following the acquisition of a hospital, the Company implements its systematic policies and procedures to improve the hospital's operating and financial performance. Key elements of the Company's operating strategy are to: (i) expand the breadth of services offered in the community to increase local market share; (ii) improve hospital operations by implementing appropriate expense controls, managing staffing levels, reducing supply costs and renegotiating certain vendor contracts; (iii) recruit additional general practitioners and specialty physicians to the community; and (iv) form relationships with local employers and regional tertiary providers to solidify the position of the Company's hospital as the focal point of the community's health care delivery system. Prior to its 1996 Recapitalization and Merger with PHC, the Company operated under the name Brim, Inc. The current operations of the Company include certain Brim operations and all of the operations of PHC. Brim and its predecessors have provided health care services, including managing and operating non-urban hospitals, since the 1970s. PHC was founded in February 1996 by GTCR Fund IV and Martin S. Rash to acquire and operate hospitals in attractive non-urban markets. In December 1996, Brim was recapitalized. Subsequently, the operations of Brim and PHC were combined in the Merger. In connection with the Recapitalization, Mr. Rash and Richard D. Gore were elected as the senior management of the Company. The Company's management team has extensive experience in acquiring and operating previously under-performing non-urban hospitals. Prior to co-founding PHC, Mr. Rash was the Chief Operating Officer of Community, an acquiror and operator of non-urban hospitals. During Mr. Rash's tenure, Community acquired many non-urban hospitals and owned or leased 36 hospitals at December 31, 1995. Mr. Gore was previously employed as Vice President and Controller of Quorum Health Group, Inc., an owner, operator and manager of acute care hospitals. John M. Rutledge, the Company's Chief Operating Officer, was previously employed as a Regional Vice President/Group Director at Community, reporting directly to Mr. Rash. Steven P. Taylor, the Company's Senior Vice President of Acquisitions and Development, was previously President of Brim Healthcare, Inc., a subsidiary of the Company. 40 42 THE NON-URBAN HEALTH CARE MARKET According to United States Census data, 33.7% of the United States population lives in counties with populations of less than 150,000. In these non-urban communities, hospitals are typically the primary source of health care, and, in many cases, a single hospital is the only provider of acute care services. As of October 1996, there were approximately 1,500 non-urban hospitals in the United States, over 1,100 of which were owned by not-for-profit or governmental entities. The Company believes that non-urban health care markets are attractive to health care service providers. Because non-urban service areas have smaller populations, there are generally only one or two hospitals in each non-urban market, resulting in less competition. The relative dominance of the acute care hospital in these smaller markets also limits the entry of alternate site providers, which provide services such as outpatient surgery, rehabilitation or diagnostic imaging. The demographic characteristics and the relative strength of the local hospital also make non-urban markets less attractive to HMOs and other forms of managed care. In addition, the Company believes that non-urban communities are generally characterized by a high level of patient and physician loyalty that fosters cooperative relationships among the local hospital, physicians and patients. Although the characteristics of the non-urban health care market present a number of opportunities, hospitals in such markets have been under considerable pressure. The not-for-profit and governmental entities that typically own and operate these hospitals may have limited access to the capital required to keep pace with advances in medical technology and to make needed capital improvements. Non-urban hospitals also frequently lack the management resources necessary to control hospital expenses, recruit physicians and expand health care services. The increasingly dynamic and complex health care regulatory environment compounds these pressures. Collectively, these factors frequently lead to poor operating performance, a decline in the breadth of services offered, dissatisfaction by community physicians and the perception of subpar quality of care in the community. As a result, patients migrate to, or are referred by local physicians to, hospitals in larger urban markets. Patient migration further increases the financial pressure on non-urban physicians and hospitals, thereby limiting their ability to address the issues which have led to these pressures. As a result of these pressures, not-for-profit and governmental owners of non-urban hospitals have increasingly sought to sell or lease these hospitals to companies, like Province, that have the access to capital and management resources to better serve the community. The Company believes that a significant opportunity for consolidation exists in the non-urban health care market. BUSINESS STRATEGY The Company's objective is to be the leading provider of high quality health care in selected non-urban markets. The key elements of the Company's strategy are to: Acquire Hospitals in Attractive Non-Urban Markets. The Company seeks to acquire hospitals which are the sole or primary provider of health care in their markets and which present the opportunity to increase profitability and local market share. Approximately 1,100 non-urban hospitals fit the Company's acquisition profile, and the Company's goal is to acquire two to four such hospitals each year. Expand Breadth of Services to Increase Local Market Share. The Company seeks to provide additional health care services and care programs in response to the needs of the community. These services may include specialty inpatient services, outpatient services, home health care and mental health clinics. The Company may also make capital investments in technology and the physical plant to further improve both the quality of health care and the reputation of the hospital in the community. By providing a broader range of services and a more attractive care setting, the Company believes it can increase health care expenditures captured locally and limit patient migration to larger urban facilities, thereby increasing hospital revenue. 41 43 Improve Hospital Operations. Following the acquisition of a hospital, the Company augments local management with appropriate operational and financial managers and installs its standardized information system. The local management team implements appropriate expense controls, manages staffing levels according to patient volumes, reduces supply costs by requiring strict compliance with the Company's national supply arrangements and renegotiates certain vendor contracts. Recruit Physicians. The Company believes that recruiting physicians in local communities is key to increasing the quality and breadth of health care. The Company works with the local hospital board, management and medical staff to determine the number and type of additional physicians needed in the community. The Company's corporate physician recruiting staff then assists the local management team in identifying and recruiting specific physicians to the community to meet those needs. Develop Health Care Networks. The Company plans to form networks to address local employers' integrated health care needs and to solidify the position of the Company's hospitals as the focal point of their respective community's health care delivery system. As part of its efforts to develop these networks, the Company seeks relationships with regional tertiary care providers. ACQUISITION PROGRAM The Company's goal is to acquire two to four hospitals each year which are primary providers of health care in attractive non-urban markets and which present the opportunity to increase the hospitals' profitability and local market share. The Company acquires hospital operations by purchasing hospitals or by entering into long-term leases. The Company targets acquisition candidates that: (i) have a minimum service area population of 20,000 with a stable or growing employment base; (ii) are the sole or primary providers of health care services in the community; (iii) have annual net patient revenue of at least $12.0 million; and (iv) have financial performance that will benefit from management's proven operating skills. There are approximately 1,100 hospitals in the United States which meet the Company's target criteria. See "Risk Factors -- Risks of Acquisition Strategy." In addition to responding to requests for proposals from entities which are seeking to sell or lease a hospital, the Company proactively identifies acquisition targets through three sources. The Company: (i) seeks to acquire selected hospitals to which it provides contract management services; (ii) identifies attractive markets and hospitals and initiates meetings with hospital owners to discuss the benefits to the community of a possible acquisition by the Company; and (iii) seeks to acquire non-urban hospitals from, or form joint ventures with, hospital systems comprised of one or more urban tertiary care hospitals and a number of non-urban hospitals. Such joint ventures allow the tertiary care hospital to maintain an affiliation to provide tertiary care for the non-urban hospitals without the management responsibility. The Company believes that it generally takes six to twelve months between the hospital owner's decision to accept offers and the consummation of a sale or lease. After a potential acquisition has been identified, the Company undertakes a systematic approach to evaluating and closing the transaction. The Company begins the acquisition process with a thorough due diligence review of the target hospital. The Company utilizes its dedicated teams of experienced personnel to conduct a formalized review of all aspects of the target's operations, including Medicare reimbursement, purchasing, fraud and abuse compliance, litigation, capital requirements, and environmental issues. During the course of its due diligence review, the Company prepares an operating plan for the target hospital, identifies opportunities for operating efficiencies and physician recruiting needs, and assesses productivity and management information systems. Throughout the process, the Company works closely with community decision-makers in order to enhance both the community's understanding of the Company's philosophy and abilities and the Company's knowledge of the needs of the community. 42 44 The competition to acquire non-urban hospitals is intense, and the Company believes that often the acquiror will be selected for a variety of reasons, not exclusively on the basis of price. The Company believes it is well positioned to compete for acquisitions for several reasons. The Company's management team has extensive experience in acquiring and operating previously under-performing non-urban hospitals. The Company also benefits from access to capital, strong financial and operating systems, a national purchasing organization, and training programs. The Company believes its strategy of increasing the access to, and the quality of, health care in the communities served by its hospitals aligns its interests with those of the communities. The Company believes that this alignment of interests, together with the Company's reputation for providing market-specific, high quality health care, its focus on physician recruiting and its proactive approach to identifying acquisition targets, enable the Company to compete successfully for acquisitions. During 1996, the Company purchased Memorial Mother Frances in Palestine, Texas and leased Parkview in Mexia, Texas and Starke Memorial in Knox, Indiana. In August 1997, the Company leased Needles in Needles, California. The Company provided management services to Parkview and Needles prior to their respective acquisitions. HOSPITAL OPERATIONS Following the acquisition of a hospital, the Company implements its systematic policies and procedures to improve the hospital's operating and financial performance. The Company implements an operating plan designed to reduce costs by improving operating efficiency and increasing revenue through the expansion of the breadth of services offered by the hospitals and the recruitment of physicians to the community. The Company also plans to form health care networks with employers in the community and regional tertiary care hospitals. Management believes that the long-term growth potential of a hospital is dependent on the Company's ability to add appropriate health care services and effectively recruit physicians. Each hospital management team is comprised of a chief executive officer, chief financial officer and chief nursing officer. The Company believes that the quality of the local management team at each hospital is critical to the hospital's success, because the management team is responsible for implementing the elements of the Company's operating plan. The operating plan is developed by the local management team in conjunction with the Company's senior management team and sets forth revenue enhancement strategies and specific expense benchmarks. The Company has implemented a performance-based compensation program for each local management team based upon the achievement of the goals set forth in the operating plan. See "Risk Factors -- Dependence on Management." While the local management team is responsible for the day-to-day operations of the hospitals, the Company's corporate staff provides support services to each hospital, including physician recruiting, corporate compliance, reimbursement advice, standardized information systems, human resources, accounting, cash management and other finance activities, tax and insurance support. Financial controls are maintained through utilization of standardized policies and procedures. The Company promotes communication among its hospitals so that local expertise and improvements can be shared throughout the Company's network. As part of the Company's efforts to improve access to high quality health care in the communities it serves, the Company adds appropriate services at its hospitals. Services and care programs added may include specialty inpatient services, such as cardiology, geriatric psychiatry, skilled nursing, rehabilitation and subacute care, and outpatient services such as same-day surgery, radiology, laboratory, pharmacy services and physical therapy. The Company may also add home health care services and mental health clinics. Management believes the establishment of quality emergency room departments and obstetrics and gynecological services are particularly important, because they are often the most visible services provided to the community. The Company also makes capital investments in technology and facilities to increase the quality and breadth of services 43 45 available in the communities. By increasing the services provided at the Company's hospitals and upgrading the technology used in providing such services, the Company believes that it improves the quality of care and the hospitals' reputation in each community, which in turn may increase patient census and revenue. To achieve the operating efficiencies set forth in the operating plan, the Company: (i) evaluates existing hospital management; (ii) adjusts staffing levels according to patient volumes using best demonstrated practices by department; (iii) capitalizes on purchasing efficiencies and renegotiates certain vendor contracts; and (iv) installs a standardized management information system. The Company also enforces strict protocols for compliance with the Company's supply contracts. The Company participates in a joint venture with a large investor-owned hospital company pursuant to which all of the Company's owned and leased hospitals purchase supplies and certain equipment at prices which management believes are among the most favorable in the industry. Vendor contracts are also evaluated, and based on cost comparisons, contracts are either renegotiated or terminated. The Company prepares for the transition of management information systems to its standardized system prior to the completion of an acquisition, so that the newly-acquired hospital can typically begin using the Company's management information systems immediately following completion of the acquisition. The Company works with local hospital boards, management and medical staff to determine the number and type of additional physicians needed in the community. The Company's corporate staff then assists the local management team in identifying and recruiting specific physicians to the community to meet those needs. The majority of physicians who relocate their practices to the communities served by the Company's hospitals are identified by the Company's internal physician recruiting staff, which is supplemented by the efforts of independent recruiting firms. When recruiting a physician to a community, the Company generally guarantees the physician a minimum level of revenue during a limited initial period and assists the physician with his or her transition to the community. The Company requires the physician to repay some or all of the amounts expended for such assistance in the event the physician leaves the community within a specified period. The Company prefers not to employ physicians, and relocating physicians rarely become employees of the Company. See "Risk Factors -- Dependence on Physicians" and " -- Health Care Regulation." The Company plans to form networks to address local employers' health care needs and to solidify the position of the Company's hospitals as the focal point of their respective community's health care delivery system. As part of its efforts to develop these networks, the Company also seeks relationships with regional tertiary care providers. Owned and Leased Hospitals The Company currently owns or leases eight general acute care hospitals in California, Texas, Colorado and Indiana with a total of 570 licensed beds. Six of the Company's eight hospitals are the only hospital in the town in which they are located. The owned and leased hospitals represented 80.3% and 86.1% of the Company's net operating revenues for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. Management believes that the facilities at its owned and leased hospitals are generally suitable and adequate for the services offered. The Company's hospitals offer a wide range of inpatient medical services such as operating/recovery rooms, intensive care units, diagnostic services and emergency room services, as well as outpatient services such as same-day surgery, radiology, laboratory, pharmacy services and physical therapy. The Company's hospitals also frequently provide certain specialty services which include skilled nursing, geriatric psychiatry, rehabilitation and home health care services. The Company's hospitals do not provide highly specialized surgical services such as organ transplants and open heart surgery and are not engaged in extensive medical research or educational programs. 44 46 The following table sets forth certain information with respect to each of the Company's currently owned and leased hospitals.
LICENSED OWNED/ HOSPITAL BEDS LEASED - -------- -------- -------- Colorado Plains Medical Center Fort Morgan, Colorado..................................... 40 Leased(1) General Hospital Eureka, California........................................ 83 Leased(2) Memorial Mother Frances Hospital Palestine, Texas.......................................... 97 Owned(3) Needles Desert Community Hospital Needles, California....................................... 53 Leased(4) Ojai Valley Community Hospital Ojai, California.......................................... 116(5) Owned Palo Verde Hospital Blythe, California........................................ 55 Leased(6) Parkview Regional Hospital Mexia, Texas.............................................. 77 Leased(7) Starke Memorial Hospital Knox, Indiana............................................. 49 Leased(8) --- Total............................................. 570
- --------------- (1) The lease expires in April 2014 and is subject to a five-year renewal term. The Company has a right of first refusal to purchase the hospital. (2) The lease expires in December 2000. The Company has the option to purchase the hospital at any time prior to termination of the lease, subject to regulatory approval. (3) The hospital is owned by a partnership of which the Company is the sole general partner (with a 1.0% general partnership interest) and has a 94.0% limited partnership interest, subject to an option by the other limited partner to acquire an additional 5.0% interest. (4) The lease expires in July 2012, and is subject to three five-year renewal terms. The Company has a right of first refusal to purchase the hospital. (5) Includes a 66-bed skilled nursing facility. (6) The lease expires in December 2002, and is subject to a ten-year renewal option. The Company has the option to purchase the hospital at any time prior to termination of the lease, subject to regulatory approval. (7) The lease expires in January 2011, and is subject to two five-year renewal terms. The Company has a right of first refusal to purchase the hospital. (8) The lease expires in September 2016, and is subject to two ten-year renewal options. The Company has a right of first refusal to purchase the hospital. Colorado Plains Medical Center is located approximately 70 miles northeast of Denver and is the only hospital in town. The hospital is the only rural-based Level III trauma center in Colorado, and one of only 10 such rural centers in the United States. Colorado Plains recently completed an $8.5 million expansion project which included expansion of surgery, recovery, emergency room and radiology facilities as well as a new entrance. The Company is planning a renovation of the hospital's obstetrical and medical/surgical units in 1998. The closest competing hospitals are located approximately 50 miles away. Colorado Plains is a sole community provider as designated under Medicare and has a service area population of approximately 43,000. General Hospital is located approximately 300 miles north of San Francisco. The hospital also operates a newly-completed ambulatory surgery center located near the hospital. The Company expects to complete a renovation of General Hospital's obstetrical unit by December 1997. There is one other hospital in Eureka, and two small hospitals located 15 and 20 miles away. The nearest tertiary care hospitals are located approximately 160 miles away. General Hospital's service area population is approximately 122,000. 45 47 Memorial Mother Frances Hospital is located approximately halfway between Dallas and Houston, and approximately 50 miles from Tyler, Texas. The hospital recently added a six-bed inpatient rehabilitation unit and a ten-bed geriatric psychiatry unit. Memorial Mother Frances has a relationship with a tertiary care hospital in Tyler. The hospital's primary competitor is also located in Palestine. The hospital's service area population is approximately 104,000. Needles Desert Community Hospital is located approximately 100 miles south of Las Vegas, Nevada and is the only hospital in town. The hospital's primary competitor is located approximately 20 miles away. Needles is a sole community provider as designated under Medicare and has a service area population of approximately 47,000. Ojai Valley Community Hospital is located approximately 85 miles northeast of Los Angeles and is the only hospital in town. Along with its 50-bed acute care hospital, Ojai Valley has a 66-bed skilled nursing facility. In 1997, Ojai Valley purchased a home health business and opened a rural health clinic in a neighboring town. The hospital's primary competitors are located 18 to 20 miles away, but due to the geography and traffic conditions, such hospitals are 30 to 60 minutes away by car. The hospital's service area population is approximately 30,000. Palo Verde Hospital is located in southeast California near the Arizona border. It is 120 miles east of Palm Springs, California and is the only hospital in town. The hospital's primary competitors are one small hospital located 45 miles away and two large hospitals located approximately 100 miles away. Palo Verde is a sole community provider as designated under Medicare and has a service area population of approximately 20,000 that increases substantially during the winter months due to a seasonal inflow of residents. Parkview Regional Hospital is located approximately 40 miles east of Waco, Texas and is the only hospital in town. The hospital recently completed a $5.7 million expansion and renovation project which included a new emergency room and new radiology, surgery and inpatient rehabilitation departments. Parkview is currently completing an outpatient rehabilitation center on the hospital campus. The hospital's primary competitors are hospitals located 35 to 40 miles away. The hospital's service area population is approximately 40,000. Starke Memorial Hospital is located approximately 50 miles from South Bend, Indiana and is the only hospital in town. The hospital opened a five-bed geriatric psychiatry unit in April 1997 and is affiliated with a tertiary hospital in South Bend. Starke Memorial's primary competitors are two large hospitals, located approximately 30 and 35 miles away. The hospital's service area population is approximately 25,000. The Company also owns a 48,000 square foot office building in Portland, Oregon and leases approximately 8,000 square feet of office space for its corporate headquarters in Brentwood, Tennessee under a 3-year lease which expires on December 31, 1999 and contains customary terms and conditions. 46 48 Operating Statistics The following table sets forth certain operating statistics for the Company's owned or leased hospitals (excluding Fifth Avenue Hospital in Seattle, Washington, which was sold in May 1995) for each of the periods presented.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------- ----------------- 1994 1995 1996 1996 1997 ------- ------- -------- ------- ------- Hospitals owned or leased (at end of period)................................... 4 4 7 5 7 Licensed beds (at end of period)............ 294 294 513 371 517 Beds in service (at end of period).......... 243 243 407 274 411 Admissions.................................. 8,868 8,839 11,460 5,101 7,446 Average length of stay (days)(1)............ 6.5 6.4 5.6 5.8 5.5 Patient days................................ 57,161 56,088 64,647 29,368 40,837 Adjusted patient days(2).................... 91,047 92,085 115,805 50,992 73,367 Occupancy rate (% of licensed beds)(3)...... 53.3 52.3 42.4 45.1 43.6 Occupancy rate (% of beds in service)(4).... 64.4 63.2 54.8 59.8 54.9 Net patient service revenue (in thousands)................................ $71,335 $71,452 $101,573 $43,391 $69,581 Gross outpatient service revenue (in thousands)................................ $46,312 $51,414 $ 78,561 $32,336 $53,680
- --------------- (1) Average length of stay is calculated based on the number of patient days divided by the number of admissions. (2) Adjusted patient days have been calculated based on an industry-accepted revenue-based formula (multiplying actual patient days by the sum of gross inpatient revenue and gross outpatient revenue and dividing the result by gross inpatient revenue for each hospital) to reflect an approximation of the volume of service provided to inpatients and outpatients by converting total patient revenues to equivalent patient days. (3) Percentages are calculated by dividing average daily census by average licensed beds. (4) Percentages are calculated by dividing average daily census by average beds in service. Sources of Revenue The Company receives payments for patient care from private insurance carriers, federal Medicare programs for elderly and disabled patients, HMOs, preferred provider organizations ("PPOs"), state Medicaid programs, the Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS"), employers and patients directly. The following table sets forth the percentage of the patient days of the Company's owned and leased hospitals (excluding Fifth Avenue Hospital and the 66-bed skilled nursing facility at Ojai Valley Community Hospital) from various payors for the periods indicated. The data for the periods presented are not strictly comparable due to the significant effect that acquisitions have had on the Company. See "Management's Discussion and Analysis of Results of Operations and Financial Condition."
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------- ----------------- 1994 1995 1996(1) 1996 1997(1) ----- ----- ------- ------ -------- Medicare............................................. 49.1% 50.2% 54.9% 53.8% 59.8% Medicaid............................................. 14.2 16.8 16.0 16.2 14.2 Private and other sources............................ 36.7 33.0 29.1 30.0 26.0 ----- ----- ----- ----- ----- Total...................................... 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== =====
- --------------- (1) All percentages in this table exclude Fifth Avenue Hospital and the 66-bed skilled nursing facility at Ojai Valley Community Hospital. Substantially all of the revenue at the Ojai Valley skilled nursing facility is provided by Medicaid. Including the Ojai Valley skilled nursing facility, the percentage of revenue from Medicare, Medicaid and private and other sources would have been 37.8%, 40.8% and 21.4%, for the year ended December 31, 1996, and 45.6%, 32.2% and 22.2% for the six months ended June 30, 1997. 47 49 Quality Assurance The Company's hospitals implement quality assurance procedures to ensure a consistently high level of care. Each hospital has a medical director who supervises and is responsible for the quality of medical care provided. In addition, each hospital has a medical advisory committee comprised of physicians who review the professional credentials of physicians applying for medical staff privileges at the hospital. Medical advisory committees also review and monitor surgical outcomes along with procedures performed and the quality of the logistical, medical and technological support provided to the physician. The Company surveys all of its patients either during their stay at the hospital or subsequently by mail to identify potential areas of improvement. All of the Company's hospitals are accredited by the Joint Commission on Accreditation of Health Care Organizations other than Palo Verde, which is currently pursuing accreditation. Regulatory Compliance Program The Company is developing a corporate-wide compliance program. In June 1997, the Company hired Starley Carr as its Vice President of Corporate Compliance. Prior to joining the Company, Mr. Carr served with the Federal Bureau of Investigation, where he investigated various white collar crimes, including those related to the health care industry. The Company's compliance program will focus on all areas of regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, laboratory and home health care operations. See "Risk Factors -- Health Care Regulation" and "-- Current Publicity." MANAGEMENT SERVICES The Company's management services division provides comprehensive management services to 50 primarily non-urban hospitals in 17 states with a total of 3,448 licensed beds. These services are provided under three- to five-year contracts with the Company. The Company generally provides a chief executive officer, who is an employee of the Company, and may also provide a chief financial officer, but it does not typically employ other hospital personnel. The Company provides a continuum of solutions to the problems faced by these hospitals through services which may include instituting new financial and operating systems and various management initiatives, such as establishing a local or regional provider network to efficiently meet a community's health care needs. Management believes the Company's contract management business provides a competitive advantage in identifying and developing relationships with suitable acquisition candidates and in understanding the local markets in which such hospitals operate. This division represented 14.6% and 10.4% of net operating revenue for the year ended December 31, 1996 and the six months ended June 30, 1997, respectively. See " -- Professional Liability." COMPETITION The primary bases of competition among hospitals in non-urban markets are the quality and scope of medical services, strength of referral network, location, and, to a lesser extent, price. With respect to the delivery of general acute care services, most of the Company's hospitals face less competition in their immediate patient service areas than would be expected in larger communities. While the Company's hospitals are generally the primary provider of health care services in their respective communities, its hospitals face competition from larger tertiary care centers and, in some cases, other non-urban hospitals. Some of the hospitals that compete with the Company are owned by governmental agencies or not-for-profit entities supported by endowments and charitable contributions, and can finance capital expenditures on a tax-exempt basis. The Company faces competition for acquisitions primarily from for-profit hospital management companies as well as not-for-profit entities. Some of the Company's competitors have greater financial and other resources than the Company. Increased competition for the acquisition of non-urban acute care hospitals could have an adverse impact on the Company's ability to acquire such hospitals on favorable terms. 48 50 EMPLOYEES AND MEDICAL STAFF As of June 30, 1997, the Company had 1,647 "full-time equivalent" employees, 19 of whom were corporate personnel. The remaining employees, most of whom are nurses and office personnel, work at the hospitals. None of the Company's employees is covered by a collective bargaining agreement. The Company considers relations with its employees to be good. The Company typically does not employ physicians and, as of June 30, 1997, the Company employed only nine practicing physicians. Certain of the Company's hospital services, including emergency room coverage, radiology, pathology and anesthesiology services, are provided through independent contractor arrangements with physicians. GOVERNMENT REIMBURSEMENT Medicare payments for general hospital inpatient care are based on a prospective payment system ("PPS"). Under the PPS, a hospital receives a fixed amount for operating costs based on the established fixed payment amount per discharge for categories of hospital treatment, commonly known as a diagnosis related group ("DRG"), for each Medicare inpatient. DRG payments do not consider a specific hospital's costs, but are adjusted for area wage differentials. The DRG payments do not include reimbursement for capital costs. Psychiatric services, long-term care, rehabilitation, pediatric services and certain designated research hospitals, and distinct parts of rehabilitation and psychiatric units within hospitals, are currently exempt from PPS and are reimbursed on a cost-based system, subject to specific reimbursement caps (known as TEFRA limits). For the year ended December 31, 1996, the Company had only one unit that was reimbursed under this methodology. For several years, the percentage increases to the DRG rates have been lower than the percentage increases in the cost of goods and services purchased by general hospitals. The index used to adjust the DRG rates is based on the cost of goods and services purchased by hospitals as well as those purchased by non-hospitals (the "Market Basket"). The historical Market Basket rates of increase were 2.0%, 1.5% and 2.0% for federal fiscal years 1995, 1996 and 1997, respectively. The Company anticipates that future legislation may decrease the future rate of increase for DRG payments, but is unable to predict the amount of the final reduction. Medicare reimburses general hospitals' capital costs separately from DRG payments. Outpatient services provided at general hospitals typically are reimbursed by Medicare at the lower of customary charges or approximately 90% of actual cost, subject to additional limits on the reimbursement of certain outpatient services. The Company anticipates that future legislation may reduce the aggregate reimbursement received, but is unable to predict the amount of the final reduction. Each state has its own Medicaid program that is funded jointly by the state and federal government. Federal law governs how each state manages its Medicaid program, but there is wide latitude for states to customize Medicaid programs to fit the needs and resources of their citizens. As a result, each state Medicaid plan has its own payment formula and recipient eligibility criteria. The Company's current operations are in states that have historically had well-funded Medicaid programs with adequate payment rates. The Company owns or leases four hospitals in California. The Medicaid program in California, known as Medi-Cal, reimburses hospital inpatient cost on one of three methods: (i) cost-based, subject to various limits known as MIRL/PIRL limits; (ii) negotiated rate per discharge or per diem for hospitals under contract; or (iii) managed care initiatives, where payment rates tend to be capitated and networks must be formed. Three of the Company's four California hospitals are cost-based for Medi-Cal and the other is paid under the contract method. None of the cost-based hospitals is currently subject to a MIRL/PIRL limit, because their cost per discharge has historically been below the limit. There can be no assurance that this will remain the case in the future. Medi- 49 51 Cal currently has a managed care initiative that is primarily targeted at urban areas. The Company does not expect that Medi-Cal will begin rural managed care contracting in the near future. Medicare has special payment provisions for "Sole Community Hospitals" or SCHs. An SCH is generally the only hospital in at least a 35-mile radius. Colorado Plains, Needles and Palo Verde qualify as SCHs under Medicare regulations. Special payment provisions related to SCHs include a higher DRG rate, which is based on a blend of hospital-specific costs and the national DRG rate; and a 90% payment "floor" for capital costs, thereby guaranteeing the hospital SCH capital reimbursement equal to 90% of capital cost. In addition, the CHAMPUS program has special payment provisions for hospitals recognized as SCHs for Medicare purposes. The Omnibus Budget Reconciliation Act of 1993 provides for certain budget targets through federal fiscal year 1997, which, if not met, may result in adjustments in payment rates. In recent years, changes in Medicare and Medicaid programs have resulted in limitations on, and reduced levels of, payment and reimbursement for a substantial portion of hospital procedures and costs. Congress recently enacted the Balanced Budget Act of 1997, which establishes a plan to balance the federal budget by fiscal year 2002, and includes significant additional reductions in spending levels for the Medicare and Medicaid programs. The Medicare, Medicaid and CHAMPUS programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review and new governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payment to facilities. The final determination of amounts earned under the programs often requires many years, because of audits by the program representatives, providers' rights of appeal and the application of numerous technical reimbursement provisions. Management believes that adequate provision has been made for such adjustments. Until final adjustment, however, significant issues remain unresolved and previously determined allowances could become either inadequate or more than ultimately required. HEALTH CARE REFORM, REGULATION AND LICENSING Certain Background Information Health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. Medicare, Medicaid, and other public and private hospital cost-containment programs, proposals to limit health care spending, proposals to limit prices and industry competitive factors are among the many factors which are highly significant to the health care industry. In addition, the health care industry is governed by a framework of federal and state laws, rules and regulations that are extremely complex and for which the industry has the benefit of only limited regulatory or judicial interpretation. Although the Company believes it is in compliance in all material respects with such laws, rules and regulations, if a determination is made that the Company was in violation of such laws, rules or regulations, its business, financial condition and results of operations could be materially adversely affected. There continue to be federal and state proposals that would, and actions that do, impose more limitations on government and private payments to providers such as the Company and proposals to increase co-payments and deductibles from program and private patients. The Company's facilities also are affected by controls imposed by government and private payors designed to reduce admissions and lengths of stay. Such controls, including what is commonly referred to as "utilization review," have resulted in fewer of certain treatments and procedures being performed. Utilization review entails the review of the admission and course of treatment of a patient by a third party. Utilization review by third-party peer review organizations ("PROs") is required in connection with the provision of care paid for by Medicare and Medicaid. Utilization review by third parties is also required under many managed care arrangements. 50 52 Many states have enacted, or are considering enacting, measures that are designed to reduce their Medicaid expenditures and to make certain changes to private health care insurance. Various states have applied, or are considering applying, for a federal waiver from current Medicaid regulations to allow them to serve some of their Medicaid participants through managed care providers. These proposals also may attempt to include coverage for some people who presently are uninsured, and generally could have the effect of reducing payments to hospitals, physicians and other providers for the same level of service provided under Medicaid. Certificate of Need Requirements Some states require approval for construction and expansion of health care facilities, including findings of need for additional or expanded health care facilities or services. Certificates of Need ("CONs"), which are issued by governmental agencies with jurisdiction over health care facilities, are at times required for capital expenditures exceeding a prescribed amount, changes in bed capacity or services and certain other matters. However, Texas and California, states in which the Company operates six of its eight hospitals, do not currently require CONs for hospital construction or changes in the mix of services. The Company is unable to predict whether it will be able to obtain any CON that may be necessary to accomplish its business objectives in any jurisdiction where such CONs are required. Anti-kickback and Self-Referral Regulations Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act, commonly known as the "anti-kickback" statute (the "Anti-kickback Amendments"), prohibit certain business practices and relationships that might affect the provision and cost of health care services reimbursable under Medicare and Medicaid, including the payment or receipt of remuneration for the referral of patients whose care will be paid for by Medicare or other government programs. Sanctions for violating the Anti-kickback Amendments include criminal penalties and civil sanctions, including fines and possible exclusion from government programs such as the Medicare and Medicaid programs. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, the U.S. Department of Health and Human Services has issued regulations that create Safe Harbors under the Anti-kickback Amendments. A given business arrangement which does not fall within a Safe Harbor is not per se illegal; however, business arrangements of health care service providers that fail to satisfy the applicable Safe Harbor criteria risk increased scrutiny by enforcement authorities. The "Health Insurance Portability and Accountability Act of 1996," which became effective January 1, 1997 broadened the scope of certain fraud and abuse laws, such as the Anti-kickback Amendments, to include all health care services, whether or not they are reimbursed under a federal program. The Company provides financial incentives to recruit physicians into the communities served by its hospitals, including loans and minimum revenue guarantees. No Safe Harbor for physician recruitment is currently in force. Although the Company is not subject to the Internal Revenue Service Revenue Rulings and related authority addressing recruitment activities by tax-exempt facilities, management believes that such IRS authority tends to set the industry standard for acceptable recruitment activities. The Company believes that its recruitment policies are being conducted in accordance with the IRS authority and industry practice. The Company also enters into certain leases with physicians and is a party to certain joint ventures with physicians. The Company also participates in a group purchasing joint venture. The Company believes that these arrangements do not violate the Anti-kickback Amendments. There can be no assurance that regulatory authorities who enforce the Anti-kickback Amendments will not determine that the Company's physician recruiting activities, other physician arrangements, or group purchasing activities violate the Anti-kickback Amendments or other federal laws. Such a determination could subject the Company to liabilities under the Social Security Act, including exclusion of the Company from participation in Medicare and Medicaid. See "Business -- Health Care Reform, Regulation and Licensing." 51 53 The Company's operations necessarily involve financial relationships with physicians on the medical staff. Such arrangements include professional services agreements for services at its hospitals and physician recruitment incentives to encourage physicians to establish private practices in markets served by the Company's owned or leased hospitals. Although the Company believes that these arrangements are lawful, no safe harbor provisions apply to physician recruitment arrangements not involving physician employment. Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect these arrangements. There is increasing scrutiny by law enforcement authorities, the Office of Inspector General ("OIG") of the Department of Health and Human Services ("HHS"), the courts, and Congress of arrangements between health care providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to exchange remuneration for patient care referrals and opportunities. Investigators have also demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purpose of payments between health care providers and potential referral sources. Enforcement actions have increased, as evidenced by recent highly publicized enforcement investigations of certain hospital activities. Although, to its knowledge, the Company is not currently the subject of any investigation which is likely to have a material adverse effect on its business, financial condition or results of operations, there can be no assurance that the Company and its hospitals will not be the subject of investigations or inquiries in the future. See "Risk Factors--Current Publicity." In addition, provisions of the Social Security Act restrict referrals by physicians of Medicare and other government-program patients to providers of a broad range of designated health services with which they have ownership or certain other financial arrangements (the "Stark Laws"). A person making a referral, or seeking payment for services referred, in violation of Stark would be subject to the following sanctions: (i) civil money penalties of up to $15,000 for each service; (ii) assessments equal to twice the dollar value for each service; and/or (iii) exclusion from participation in the Medicare Program (which can subject the person to exclusion from participation in state health care programs). Further, if any physician or entity enters into an arrangement or scheme that the physician or entity knows or should know has the principal purpose of assuring referrals by the physician to a particular entity, and the physician directly made referrals to such entity, then such physician or entity could be subject to a civil money penalty of up to $100,000. Many states have adopted or are considering similar legislative proposals, some of which extend beyond the Medicaid program to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the care. The Company's contracts with physicians on the medical staff of its hospitals and its participation in and development of joint ventures and other financial relationships with physicians could be adversely affected by these amendments and similar state enactments. The Company is unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations. Further changes in the regulatory framework or in the interpretation of these laws, rules and regulations could have a material adverse effect on the Company's business, financial condition and results of operations. Environmental Regulations The Company's health care operations generate medical waste that must be disposed of in compliance with federal, state and local environmental laws, rules and regulations. The Company's operations, as well as the Company's purchases and sales of facilities, are also subject to various other environmental laws, rules and regulations. Health Care Facility Licensing Requirements The Company's health care facilities are subject to extensive federal, state and local legislation and regulation. In order to maintain their operating licenses, health care facilities must comply with 52 54 strict standards concerning medical care, equipment and hygiene. Various licenses and permits also are required in order to dispense narcotics, operate pharmacies, handle radioactive materials and operate certain equipment. The Company's health care facilities hold all required governmental approvals, licenses and permits. All licenses, provider numbers and other permits or approvals required to perform the Company's business operations are held by subsidiaries of the Company. Each of the Company's facilities that is eligible for accreditation is fully accredited by the Joint Commission on Accreditation of Health Care Organizations other than Palo Verde, which is currently pursuing accreditation. Utilization Review Compliance and Hospital Governance The Company's health care facilities are subject to and comply with various forms of utilization review. In addition, under the Medicare prospective payment system, each state must have a PRO to carry out a federally mandated system of review of Medicare patient admissions, treatments and discharges in general hospital. Medical and surgical services and practices are extensively supervised by committees of staff doctors at each health care facility, are overseen by each health care facility's local governing board, the primary voting members of which are physicians and community members, and are reviewed by the Company's quality assurance personnel. The local governing boards also help maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures and approve the credentials and disciplining of medical staff members. Governmental Developments Regarding Sales of Not-for-Profit Hospitals In recent years, the legislatures and attorneys general of several states have shown a heightened level of interest in transactions involving the sale of non-profit hospitals. Although the level of interest varies from state to state, the trend is to provide for increased governmental review, and in some cases approval, of transactions in which not-for-profit corporations sell a health care facility. Attorneys general in certain states, including California, have been especially active in evaluating these transactions. Although the Company has not yet been adversely affected as a result of these trends, such increased scrutiny may increase the difficulty or prevent the completion of transactions with not-for-profit organizations in certain states in the future. California Seismic Standards California recently adopted a law requiring standards and regulations to be developed to ensure hospitals meet seismic performance standards. Within three years after adoption of the standards by the California Building Standards Commission, owners of subject properties are to evaluate their facilities and develop a plan and schedule for complying with the standards. To date, the Commission has adopted evaluation criteria but has not yet adopted the retrofit standards. Therefore, the Company is unable, at this time, to evaluate its facilities to determine whether the requirements or the cost of complying with these requirements will have a material adverse effect on the Company's business, financial condition or results of operations. PROFESSIONAL LIABILITY As part of its business, the Company is subject to claims of liability for events occurring as part of the ordinary course of hospital operations. To cover these claims, the Company maintains professional malpractice liability insurance and general liability insurance in amounts which management believes to be sufficient for its operations, although some claims may exceed the scope of the coverage in effect. The Company also maintains umbrella coverage. At various times in the past, the cost of malpractice and other liability insurance has risen significantly. Therefore, there can be no assurance that such insurance will continue to be available at a reasonable price for the Company to maintain adequate levels of insurance. 53 55 Through its typical hospital management contract, the Company attempts to protect itself from such liability by requiring the hospital to maintain certain specified limits of insurance coverage, including professional liability, comprehensive general liability, worker's compensation and fidelity insurance, and by requiring the hospital to name the Company as an additional insured party on the hospital's professional and comprehensive general liability policies. The Company's management contracts also usually provide for the indemnification of the Company by the hospital against claims that arise out of the actions of the hospital employees, medical staff members and other non-Company personnel. However, there can be no assurance the hospitals will maintain such insurance or that such indemnities will be available. LEGAL PROCEEDINGS The Company is, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts or for wrongful restriction of or interference with physician's staff privileges. In certain of these actions, plaintiffs request punitive or other damages that may not be covered by insurance. The Company is currently not a party to any proceeding which, in management's opinion, would have a material adverse effect on the Company's business, financial condition or results of operations. 54 56 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning the Company's directors and executive officers as of October 1, 1997.
NAME AGE POSITION - ---- --- -------- Martin S. Rash................... 42 President, Chief Executive Officer and Director Richard D. Gore.................. 45 Executive Vice President and Chief Financial Officer John M. Rutledge................. 39 Senior Vice President and Chief Operating Officer Steven P. Taylor................. 45 Senior Vice President of Acquisitions and Development James O. McKinney................ 43 Senior Vice President of Managed Operations Howard T. Wall, III.............. 39 Senior Vice President and General Counsel Brenda B. Rector................. 49 Vice President and Controller Bruce V. Rauner.................. 41 Chairman of the Board and Director Joseph P. Nolan.................. 33 Director A.E. Brim........................ 67 Director Michael T. Willis................ 53 Director David L. Steffy.................. 54 Director
Mr. Rash has served as the President and Chief Executive Officer and as a director of the Company since the Recapitalization in December 1996. From February 1996 to December 1996, Mr. Rash served as Chief Executive Officer of PHC. Mr. Rash was employed by Community Health Systems, Inc., an operator of non-urban acute care hospitals, from 1986 to February 1996, and served as its Chief Operating Officer from February 1994 to February 1996. Mr. Gore has served as Executive Vice President and Chief Financial Officer of the Company since the Recapitalization in December 1996. From April 1996 to December 1996, Mr. Gore served as Executive Vice President and Chief Financial Officer of PHC. Mr. Gore served as Vice President and Controller of Quorum Health Group, Inc., a hospital management company, from February 1990 to April 1996. Mr. Rutledge has served as Senior Vice President and Chief Operating Officer of the Company since December 1996. From 1986 to October 1996, Mr. Rutledge served in several senior management positions with Community Health Systems, Inc., most recently serving as a Regional Vice President/Group Director from 1992 to October 1996. Mr. Taylor has served as Senior Vice President of Acquisitions and Development of the Company since the Merger in December 1996. From 1986 to December 1996, Mr. Taylor served as President of Brim Healthcare, Inc., a subsidiary of the Company ("Brim Healthcare"). Mr. Taylor is a Fellow of the American College of Healthcare Executives. Mr. McKinney has served as Senior Vice President of Managed Operations of the Company and President of Brim Healthcare since January 1997. From 1994 to 1997, Mr. McKinney served as Senior Vice President of Brim Healthcare. He served as a Vice President of Brim Healthcare from 1990 to 1994. Mr. Wall has served as Senior Vice President and General Counsel of the Company since September 1997. From 1990 to September 1997, Mr. Wall served as a Partner of Waller Lansden Dorch & Davis a law firm based in Nashville, Tennessee, and practiced in the health care group. Ms. Rector has served as Vice President and Controller of the Company since the Merger in December 1996. From October 1996 to December 1996, Ms. Rector served as Vice President and 55 57 Controller of PHC. From October 1990 to October 1996, Ms. Rector served as a partner in Ernst & Young LLP's health care industry practice. Mr. Rauner has served as Chairman of the Board and as a director of the Company since the Merger in December 1996, and served as a director of PHC from its inception in February 1996 to December 1996. Mr. Rauner has been a Principal with Golder, Thoma, Cressey, Rauner, Inc., a venture capital firm and the general partner of GTCR Fund IV, since 1981. Mr. Rauner is also a director of Lason, Inc., Polymer Group, Inc., Coinmach Laundry Corporation, Esquire Communications Ltd. and COREStaff, Inc. Mr. Nolan has served as a director of the Company since the Recapitalization in December 1996, and served as a director of PHC from its inception in February 1996 to December 1996. Mr. Nolan has been a Principal of Golder, Thoma, Cressey, Rauner, Inc. since July 1996. Mr. Nolan joined Golder, Thoma, Cressey, Rauner, Inc. in February 1994. From May 1990 to January 1994, Mr. Nolan served as Vice President Corporate Finance at Dean Witter Reynolds Inc. Mr. Nolan is also a director of Lason, Inc. and Esquire Communications Ltd. Mr. Brim formed Brim, Inc. and has served as a director of the Company since its formation. He has served as Chairman Emeritus since December 1996. From the Company's formation until December 1996, he served as Chairman and Chief Executive Officer of the Company. Mr. Willis has served as a director of the Company since August 1997. Mr. Willis has served as Chairman of the Board, Chief Executive Officer and President of COREStaff, Inc., a diversified staffing services company, since 1993. Mr. Willis is also a director of Southwest Bank of Texas. Mr. Steffy has served as a director of the Company since August 1997. Mr. Steffy is a founder and director of Intensiva HealthCare Corporation, a long-term acute care hospital company, Odyessy Healthcare Inc., a hospice health care company and Arcadian Healthcare Management, an operator of rural healthcare service networks. From 1985 to 1996, Mr. Steffy was Vice Chairman and Director of Community Health Systems, Inc., a company he co-founded. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is currently composed of Messrs. Brim, Nolan and Willis. Mr. Brim served as Chairman and Chief Executive Officer of the Company until the Merger in December 1996, and he is currently an employee of the Company. See "--Employment Agreements" for a description of Mr. Brim's employment agreement. Mr. Nolan is a Principal of Golder, Thoma, Cressey, Rauner, Inc., which is a party to a professional services agreement with the Company which will terminate immediately prior to the consummation of the offering. See "Certain Relationships and Related Transactions." During 1996, the Board had no separate compensation committee and compensation of executive officers was determined by the Board. No executive officer of the Company served as a member of the compensation committee or as a director of any other entity whose executive officer serves as a director of the Company. 56 58 EXECUTIVE COMPENSATION The following table summarizes the compensation paid by the Company and its subsidiaries to the Company's chief executive officer and four other most highly compensated executive officers during the year ended December 31, 1996 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ALL OTHER ----------------------------- COMPEN- NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SATION($)(1) - --------------------------- ---- --------- -------- ------------ Martin S. Rash(2)..................................... 1996 229,166 114,583 -- President and Chief Executive Officer Richard D. Gore(3).................................... 1996 123,958 61,979 -- Executive Vice President and Chief Financial Officer Steven P. Taylor...................................... 1996 196,027 48,180 6,436 Senior Vice President of Acquisitions and Development James O. McKinney..................................... 1996 141,036 20,974 4,760 Senior Vice President of Managed Operations A.E. Brim............................................. 1996 228,947 53,521 6,111 Former Chief Executive Officer
- --------------- (1) Reflects Company contributions under a 401(k) plan. (2) Mr. Rash was compensated at an annual salary of $250,000, and he joined PHC upon its formation in February 1996 and became the Company's Chief Executive Officer in December 1996. (3) Mr. Gore was compensated at an annual salary of $175,000 and he joined PHC in April 1996 and became the Company's Executive Vice President and Chief Financial Officer in December 1996. DIRECTOR COMPENSATION Directors of the Company who are employees of the Company or its subsidiaries are not entitled to receive any fees for serving as directors. Following the consummation of the offering, non-employee directors of the Company will receive a fee of $1,000 per board meeting attended and will be reimbursed for out-of-pocket expenses related to the Company's business. In addition, non-employee directors of the Company will be eligible to participate in the Company's 1997 Long-Term Equity Incentive Plan. EMPLOYMENT AGREEMENTS The Company entered into Senior Management Agreements with Messrs. Rash and Gore effective as of December 17, 1996. Messrs. Rash and Gore will be the Company's Chief Executive Officer and Chief Financial Officer, respectively, and will receive annual base salaries determined by the Company's Board of Directors (the "Board"). Mr. Rash's annual base salary may not be less than $250,000 and Mr. Gore's salary may not be less than $175,000. Each will be eligible to receive a bonus each year of up to 50% of his annual base salary for such year, based on the achievement of certain operational and financial objectives. Their employment periods continue until their resignation, disability, or death, or until the Board determines that termination of their employment is in the best interests of the Company. In the event Mr. Rash's or Mr. Gore's employment is terminated by the Company without cause or as a result of death or disability, the Company has agreed to pay to such executive an amount equal to twice his annual base salary; provided that such severance payments cease upon acceptance of employment with an entity which owns and operates rural hospitals. Messrs. Rash and Gore have agreed not to compete with the Company or solicit Company employees following the termination of their employment for a period of two years in the case of Mr. Rash, or one year the case of Mr. Gore. The Company entered into Employment Agreements with Messrs. Taylor and Brim effective as of December 17, 1996. Mr. Taylor will serve as a Senior Vice President of the Company and will 57 59 receive an annual base salary of $176,000. Mr. Brim will receive an annual base salary of $121,680. The base salaries of Messrs. Taylor and Brim will be increased in accordance with increases in the salary of similarly situated executives of the Company. Mr. Taylor is entitled to a bonus each year equal to 50% of his annual base salary contingent upon the Company's achievement of budget targets. The Company has agreed to pay the interest on a $200,000 loan made to Mr. Taylor by U.S. Bank of Oregon, provided that such loan must be repaid no later than the effective date of the Registration Statement of which this Prospectus is a part. Mr. Brim is entitled to an automobile and expense allowance and the Company pays certain club dues on his behalf. Each employment agreement terminates on the earliest to occur of the executive's death, permanent disability, termination for cause, voluntary termination and December 17, 1999. In the event the employment of Mr. Taylor or Mr. Brim is terminated without cause, the Company has agreed to pay such executive an amount equal to his base salary and, in the case of Mr. Taylor, the maximum bonus payment, for the unexpired portion of the term of such executive's employment. Messrs. Taylor and Brim have agreed not to compete with the Company or solicit Company employees during the term of their employment, and have agreed not to disclose confidential information regarding the Company. LONG-TERM EQUITY INCENTIVE PLAN In March 1997 the Board adopted the 1997 Long-Term Equity Incentive Plan, and in September 1997 the Board and the stockholders approved an increase in the number of shares available pursuant to the plan (as amended, the "1997 Plan"). The 1997 Plan provides for grants of stock options, stock appreciation rights ("SARs") in tandem with options, restricted stock, performance awards and any combination of the foregoing to certain directors, officers and key employees of the Company and its subsidiaries. A total of 1,300,000 shares of Common Stock will be available for issuance pursuant to the 1997 Plan. The 1997 Plan will be administered by the Compensation Committee. As grants to be awarded under the 1997 Plan will be made entirely in the discretion of the Compensation Committee, the recipients, amounts and values of future benefits to be received pursuant to the 1997 Plan are not determinable. In March 1997 the Company granted options to purchase an aggregate of 385,765 shares of Common Stock, including grants of options to purchase 18,519 shares to Mr. Taylor, 7,408 shares to Mr. McKinney and 9,260 shares to Mr. Brim. All of the options granted in March 1997 have an exercise price of $3.38 per share, and all of such options are subject to vesting in five equal annual installments. Pursuant to the 1997 Plan, the Compensation committee may award grants of incentive stock options conforming to the provisions of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") ("incentive options"), and other stock options ("non-qualified options"), subject to a maximum award of 155,556 options or SARs to any one grantee in any calendar year. The exercise price of any option will be determined by the Compensation Committee in its discretion, provided that the exercise price of an incentive option may not be less than 100% of the fair market value of a share of Common Stock on the date of grant of the option, and the exercise price of an incentive option awarded to a person who owns stock constituting more than 10% of the voting power of the Company may not be less than 110% of such fair market value on such date. The term of each option will be established by the Compensation Committee, subject to a maximum term of 10 years from the date of grant in the case of a non-qualified option or an incentive option and of five years from the date of grant in the case of an incentive option granted to a person who owns stock constituting more than 10% of the voting power of the Company. In addition, the 1997 Plan provides that all options generally cease vesting on, and terminate 90 days after, the date on which a grantee ceases to be a director, officer or employee of the Company or its subsidiaries, although the 1997 Plan allows certain exceptions depending upon the circumstances of cessation. In the case of the grantee's death or disability, all of the grantee's options become fully vested and exercisable and remain so for one year after the date of death or disability. In the event of retirement, only the options vested on the date of retirement remain exercisable, for a period of three years after 58 60 retirement, so long as the grantee does not compete with the Company during such period. Upon termination for cause, all options terminate immediately. In addition, immediately prior to a change in control of the Company, all options become fully vested and exercisable. The Compensation Committee may grant SARs in tandem with stock options to any optionee pursuant to the 1997 Plan. SARs become exercisable only when, to the extent and on the conditions that the related options are exercisable, and they expire at the same time the related options expire. The exercise of an option results in the immediate forfeiture of any related SAR to the extent the option is exercised, and the exercise of an SAR results in the immediate forfeiture of any related option to the extent the SAR is exercised. Upon exercise of an SAR, the grantee will receive an amount in cash and/or shares of Common Stock equal to the difference between the fair market value of a share of Common Stock on the date of exercise and the exercise price of the option to which it relates, multiplied by the number of shares as to which the SAR is exercised. Under the 1997 Plan, the Compensation Committee may award restricted stock subject to such conditions and restrictions, and for such duration (which shall be at least six months except as otherwise described below), as it determines in its discretion. A grantee will be required to pay the Company at least the aggregate par value of any shares of restricted stock within ten days of the date of grant, unless such shares are treasury shares. Except as otherwise provided by the Compensation Committee, all restrictions on a grantee's restricted stock will lapse immediately prior to a change in control of the Company or at such time as the grantee ceases to be a director, officer or employee of the Company and its subsidiaries due to death, disability or retirement. If a grantee ceases to serve as such a director, office or employee for any other reason, all his or her restricted stock as to which the applicable restrictions have not lapsed will be forfeited immediately. Pursuant to the 1997 Plan, the Compensation Committee may grant performance awards contingent upon achievement of set goals and objectives with respect to specified performance criteria. Performance awards may include specific dollar-value target awards, performance units, the value of which is established by the Compensation Committee at the time of grant, and/or performance shares, the value of which is equal to the fair market value of a share of Common Stock on the date of grant. The value of a performance award may be fixed or fluctuate on the basis of specified performance criteria. Unless the Compensation Committee determines otherwise, no award under the 1997 Plan may vest and become exercisable within six months of the date of grant; provided that all awards vest immediately prior to a change in control of the Company and in certain other circumstances upon a participant's termination of employment or performance of services for the Company as described above. Unless the Compensation Committee determines otherwise, no award made pursuant to the 1997 Plan will be transferable otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order, and each award may be exercised only by the grantee or his or her guardian or legal representative. The Board may amend or terminate the 1997 Plan in its discretion, except that no amendment will become effective without prior approval of the Company's stockholders if such approval is necessary for continued compliance with the performance-based compensation exception of Section 162(m) of the Code or any stock exchange listing requirements. If not previously terminated by the Board, the 1997 Plan will terminate on March 3, 2007. 59 61 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS REDEMPTION OF SENIOR PREFERRED STOCK AND COMMON STOCK CONVERSION AND REPURCHASE Of the estimated $73.0 million in net proceeds from the offering, $21.9 million will be used to redeem all of the outstanding shares of the Senior Preferred Stock, which are held by Leeway & Co. In addition, in connection with the offering, all outstanding shares of Junior Preferred Stock will be converted into shares of Common Stock based on the liquidation value of the Junior Preferred Stock and the initial public offering price, and the Company will use a portion of the proceeds from the offering to repurchase from GTCR Fund IV and Leeway & Co. the shares of Common Stock which are issued upon conversion of 13,636 of their shares of Junior Preferred Stock for an aggregate purchase price of $14.5 million (based on an assumed initial offering price of $14.00). Dividends have accrued daily at a rate of 11.0% per annum on the Senior Preferred Stock and 8.0% per annum on the Junior Preferred Stock since the date of issuance. RECENT STOCK PURCHASES In connection with the Recapitalization, the stockholders of the Company entered into a Stockholders Agreement with the Company (the "Stockholders Agreement"). On July 15, 1997, pursuant to the terms of the Stockholders Agreement and a Purchase Agreement dated as of July 15, 1997 between the Company and the Investors, the Company sold 2,733 shares of Junior Preferred Stock and 607,334 shares of Common Stock to GTCR Fund IV; 794 shares of Junior Preferred Stock and 176,445 shares of Common Stock to Leeway & Co.; 64 shares of Junior Preferred Stock and 97,112 shares of Common Stock to Mr. Rash; 119 shares of Junior Preferred Stock and 67,334 shares of Common Stock to Mr. Gore; and 22.5 shares of Junior Preferred Stock and 5,000 shares of Common Stock to each of the two other Investors for a purchase price of $1,000 per share of Junior Preferred Stock and $0.45 per share of Common Stock, resulting in an aggregate purchase price of $4.2 million. Mr. Rash is a Director and executive officer of the Company, and Mr. Gore is an executive officer of the Company. The two other Investors are affiliated with banks which are lenders to the Company under its bank credit facility. In addition, in September 1997, Leeway & Co. exercised its warrant to purchase 343,265 shares of Common Stock for an aggregate exercise price of $15,447. EXECUTIVE NOTES In connection with the Recapitalization, the Company loaned $112,956 to Mr. Rash and $67,768 to Mr. Gore pursuant to promissory notes (the "Executive Notes"). In addition, in connection with the Recapitalization, Mr. Gore borrowed an additional $211,200 from the Company pursuant to a demand note (the "Demand Note") which was subsequently repaid. The Company loaned such amounts to Messrs. Rash and Gore to finance a portion of their purchase of the Company's securities pursuant to the Recapitalization. The Executive Notes and the Demand Note bear interest at a rate per annum equal to the lesser of: (i) the rate designated in The Wall Street Journal as the "prime rate;" and (ii) the highest rate permitted by applicable law. The principal amount of the Executive Notes and all interest accrued thereon mature on December 17, 2002. The Executive Notes may be prepaid in whole or in part at any time. PROFESSIONAL SERVICES AGREEMENT The Company has a Professional Services Agreement with Golder, Thoma, Cressey, Rauner, Inc. pursuant to which Golder, Thoma, Cressey, Rauner, Inc. provides financial and management consulting services. Under this agreement, Golder, Thoma, Cressey, Rauner, Inc. receives an annual management fee of $200,000 and a fee of 1.25% of the amount of debt and equity investments, for their assistance in obtaining such investments. During 1996 and through June 30, 1997, the Company had paid or accrued $1.4 million and $99,179, respectively, in fees under the agreement. An additional $52,274 is payable in connection with the Company's sale of securities in July 1997. 60 62 The agreement will be terminated immediately prior to the consummation of the offering, and no fee is payable with respect to the issuance of Common Stock in the offering. Messrs. Rauner and Nolan will continue to serve as directors of the Company, however, and they will be compensated as non-employee directors. See "Management -- Director Compensation." STOCKHOLDERS AGREEMENT AND SENIOR MANAGEMENT AGREEMENTS In connection with the Recapitalization, and in addition to becoming parties to the Stockholders Agreement, Messrs. Rash and Gore entered into Senior Management Agreements with the Company, GTCR Fund IV and Leeway & Co. (as amended, the "Executive Agreements"). The Executive Agreements provide that a portion of the Common Stock purchased by each of Messrs. Rash and Gore is subject to vesting (the "Vesting Shares"). Upon completion of the offering, 50% of the Vesting Shares will become vested, and the remaining Vesting Shares will become vested in equal installments on the first three anniversaries of the completion of the offering. Unvested shares are subject to repurchase by the Company (or, if the Company does not elect to repurchase such shares, by GTCR Fund IV) at their original cost upon termination of executive's employment with the Company for any reason. For purposes of determining earnings per share, 100% of the Common Stock purchased by Messrs. Rash and Gore is considered outstanding. The Executive Agreements entitle the Company and GTCR Fund IV to repurchase from each of Messrs. Rash and Gore upon the termination of his employment: (i) Junior Preferred Stock and vested Common Stock at a price equal to fair market value; and (ii) unvested Common Stock at a price equal to original cost. The Stockholders Agreement entitles the Company and GTCR Fund IV to repurchase shares of the Common Stock and Junior Preferred Stock from an employee stockholder upon the termination of such employee's employment by the Company at a price equal to fair market value. The Stockholders Agreement and the Executive Agreements also contain restrictions on the transfer of the Company's securities. Pursuant to the Stockholders Agreement, the stockholders agree to consent to and participate in any sale of the Company approved by the Board and by the holders of a majority of the Common Stock. Upon the completion of the offering, the Stockholders Agreement will be terminated, and the portions of the Executive Agreements which restrict the transfer of the Company's securities will be terminated. REGISTRATION AGREEMENT At the time of the Recapitalization the Company entered into a Registration Agreement with its stockholders. See "Shares Eligible for Future Sale -- Registration Agreement." SENIOR LIVING DIVESTITURE Prior to the Recapitalization in December 1996, Brim divested its senior living business through a series of transactions. In connection therewith, Mr. Brim and certain other persons who were officers and directors of Brim invested an aggregate of $5.8 million in the purchasers of Brim's senior living business. In addition, in connection with the divestiture of the senior living business, a limited liability company whose members included Mr. Brim, Mr. Taylor and certain other persons who were officers and directors of Brim at such time purchased from Brim three medical buildings for a purchase price of $406,500 plus the assumption of approximately $800,000 of indebtedness. OPTION SETTLEMENTS In connection with the Recapitalization, all outstanding stock options of Brim, Inc. were bought out. Pursuant to this option buyout, Messrs. Brim, McKinney and Taylor received $861,326, $144,498 and $861,326, respectively, in respect of their Brim, Inc. stock options. 61 63 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of July 31, 1997 and immediately following the offering by: (i) each person who is known by the Company to own beneficially more than five percent of the Common Stock; (ii) each director and Named Executive Officer of the Company; and (iii) all directors and executive officers of the Company as a group. To the knowledge of the Company, each of the persons named in the table has sole voting and investment power as to the shares shown unless otherwise noted. Unless otherwise noted, the address of each holder of five percent or more of the Common Stock is the Company's corporate address.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR OWNED AFTER TO OFFERING OFFERING(1) ------------------- ------------------- NAME NUMBER PERCENT NUMBER PERCENT - ---- --------- ------- --------- ------- Golder, Thoma, Cressey, Rauner Fund IV, L.P.(2)...... 5,050,446 58.9% 5,912,791 37.7% Bruce V. Rauner(2)................................... 5,050,446 58.9 5,912,791 37.7 Joseph P. Nolan(2)................................... 5,050,446 58.9 5,912,791 37.7 Leeway & Co.(3)...................................... 1,353,488 15.8 1,525,557 9.7 Martin S. Rash....................................... 799,217 9.3 828,297 5.3 Richard D. Gore...................................... 507,197 5.9 561,572 3.6 Steven P. Taylor..................................... 149,778 1.7 201,203 1.3 James O. McKinney.................................... 23,112 * 31,047 * A.E. Brim(4)......................................... 149,778 1.7 201,203 1.3 Michael T. Willis.................................... -- -- -- -- David L. Steffy...................................... -- -- -- -- All executive officers and directors as a group (11 persons)........................................... 6,679,528 77.8% 7,736,113 49.3%
- --------------- * Less than 1%. (1) Gives effect to the Preferred Stock Conversion and the repurchase of Shares of Common Stock with a portion of the proceeds of the offering, in each case at an assumed initial public offering price of $14.00 per share and an assumed conversion date of October 15, 1997. (2) All of such shares are held of record by GTCR Fund IV. Golder, Thoma, Cressey, Rauner, Inc. is the general partner of GTCR IV, L.P., which is the general partner of GTCR Fund IV. Messrs. Rauner and Nolan are Principals of Golder, Thoma, Cressey, Rauner, Inc., and may be deemed to share the power to vote and dispose of such shares. The address of GTCR Fund IV is 6100 Sears Tower, Chicago, Illinois 60606. Each of Messrs. Rauner and Nolan disclaims beneficial ownership of the shares of Common Stock owned by GTCR Fund IV. (3) The address of Leeway & Co. is c/o State Street Bank and Trust Company, Master Trust Division -- Q4W, P.O. Box 1992, Boston, Massachusetts 02101. (4) All of such shares are held of record by Brim Capital Corporation. DESCRIPTION OF CAPITAL STOCK Upon consummation of the Reincorporation, the Company's authorized capital stock will consist of 25.0 million shares of Common Stock, par value $0.01 per share, 25,000 shares of Senior Preferred Stock, 50,000 shares of Junior Preferred Stock and 100,000 shares of Preferred Stock. At July 31, 1997, there were 8,238,245 shares of Common Stock, 20,000 shares of Senior Preferred Stock, 32,295 shares of Junior Preferred Stock and no shares of Preferred Stock outstanding. Upon completion of the offering and after giving effect to the use of proceeds therefrom and the Preferred Stock Conversion in connection with the offering, 15,698,314 shares of Common Stock will be issued and outstanding, and no shares of Senior Preferred Stock, Junior Preferred Stock or Preferred Stock will be outstanding. The following summary of certain provisions of the Company's capital stock describes all material provisions of, but does not purport to be complete, and is subject to, and qualified in its entirety by, the Certificate of Incorporation and the Bylaws of the Company that are 62 64 included as exhibits to the Registration Statement of which this Prospectus forms a part and by the provisions of applicable law. COMMON STOCK The issued and outstanding shares of Common Stock are, and the shares of Common Stock being offered will be upon payment therefor, validly issued, fully paid and nonassessable. Subject to the prior rights of the holders of any Preferred Stock, the holders of outstanding shares of Common Stock are entitled to receive dividends out of assets legally available therefor at such time and in such amounts as the Board of Directors may from time to time determine. See "Dividend Policy." The shares of Common Stock are not redeemable or convertible, and the holders thereof have no preemptive or subscription rights to purchase any securities of the Company. Upon liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to receive pro rata the assets of the Company which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of Preferred Stock then outstanding. Each outstanding share of Common Stock is entitled to vote on all matters submitted to a vote of stockholders. Application has been made for approval and trading of the Common Stock on the Nasdaq National Market under the symbol "PRHC." PREFERRED STOCK The Board may, without any further vote or action by the Company's stockholders, from time to time, direct the issuance of shares of Preferred Stock in one or more series with such designations, rights, preferences and limitations as the Board may determine, including the consideration received therefor. The Board also has the authority to determine the number of shares comprising each series, dividend rates, redemption provisions, liquidation preferences, sinking fund provisions, conversion rights and voting rights without the approval by the holders of Common Stock. Although it is not possible to state the effect that any issuance of Preferred Stock might have on the rights of holders of Common Stock, the issuance of Preferred Stock may have one or more of the following effects: (i) to restrict Common Stock dividends if Preferred Stock dividends have not been paid; (ii) to dilute the voting power and equity interest of holders of Common Stock to the extent that any series of Preferred Stock has voting rights or is convertible into Common Stock; or (iii) to prevent current holders of Common Stock from participating in the distribution of the Company's assets upon liquidation until any liquidation preferences granted to holders of Preferred Stock are satisfied. In addition, the issuance of Preferred Stock may, under certain circumstances, have the effect of discouraging a change in control of the Company by, for example, granting voting rights to holders of Preferred Stock that require approval by the separate vote of the holders of Preferred Stock for any amendment to the Company's Certificate of Incorporation or any reorganization, consolidation, merger or other similar transaction involving the Company. As a result, the issuance of the Preferred Stock may discourage bids for the Common Stock at a premium over the market price therefor, and could have a materially adverse effect on the market value of the Common Stock. Upon consummation of the offering and the redemption in full of the Senior Preferred Stock and conversion of the Junior Preferred Stock, there will be no shares of Preferred Stock outstanding. The Board of Directors does not presently intend to issue any shares of Preferred Stock. CERTAIN PROVISIONS OF DELAWARE LAW Following the Reincorporation, the Company will be governed by the provisions of Section 203 of the Delaware General Corporation Law. In general, the law prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. "Business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to 63 65 the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts with respect to the Company and, accordingly, may discourage attempts to acquire the Company. LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS Following the Reincorporation, the Company's Certificate of Incorporation will limit the liability of directors to the fullest extent permitted by the Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, including gross negligence, except liability for: (i) breach of the director's duty of loyalty; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; (iii) the unlawful payment of a dividend or unlawful stock purchase or redemption; and (iv) any transaction from which the director derives an improper personal benefit. This provision of the Company's Certificate of Incorporation has no effect on the availability of equitable remedies such as injunction or rescission. Additionally, this provision will not limit liability under state or federal securities laws. The Certificate of Incorporation also provides that the Company shall indemnify directors and officers of the Company to the fullest extent permitted by such law. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as directors. CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS AFFECTING CHANGE OF CONTROL The Company's Certificate of Incorporation and By-laws include certain restrictions on who may call a special meeting of stockholders and prohibit certain actions by written consent of the holders of the Common Stock. The effect of these provisions may be the delaying, deterring or preventing of a future takeover or change in control of the Company unless such takeover or change in control is approved by the Board. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for the Common Stock is First Union National Bank. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have 15,698,314 shares of Common Stock outstanding (16,553,314 shares if Underwriter's over-allotment option is exercised in full). Of these shares, the 5,700,000 shares of Common Stock sold in the offering will be tradeable without restriction under the Securities Act, except for any such shares which may be acquired by an "affiliate" of the Company (an "Affiliate"), as that term is defined in Rule 144 under the Securities Act ("Rule 144"), which shares will be subject to the resale limitations of Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, if a period of at least one year has elapsed since the later of the date the "restricted securities" (as that phrase is defined in Rule 144) were acquired from the Company and the date they were acquired from an Affiliate, then the holder of such restricted securities (including an Affiliate) is entitled to sell a number of shares within any three-month period that does not exceed the greater of 1% of the then outstanding shares of the Common Stock (approximately 157,000 shares immediately after this offering) or the average weekly reported volume of trading of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding such sale. The holder may only sell such shares through unsolicited brokers' transactions. Sales under Rule 144 are also subject to certain requirements pertaining to the manner of such sales, notices of such sales and the availability of current public information concerning the Company. Affiliates may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other requirements but without regard to the one-year period. Commencing 90 days after the 64 66 completion of the offering, 7,280,020 shares of Common Stock will be eligible for sale in the public market under Rule 144, subject to the volume limitations and other requirements described above, without consideration of the contractual restrictions described below. Under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted shares were acquired from the Company and the date they were acquired from an Affiliate, as applicable, a holder of such restricted shares who is not an Affiliate at the time of the sale and has not been an Affiliate for at least three months prior to the sale would be entitled to sell the shares immediately without regard to the volume limitations and other conditions described above. Ninety days after the date of this Prospectus, no shares of Common Stock will be eligible for sale without restriction under Rule 144(k). Notwithstanding the foregoing, the Company, its directors and executive officers have agreed that for a period of 180 days after the date of the offering they will not, without the prior written consent of Alex. Brown & Sons Incorporated, offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock except pursuant to the Underwriting Agreement. Of the approximately 7,280,020 shares of Common Stock otherwise eligible for sale as discussed above, substantially all are subject to such agreements. Prior to the offering there has been no market for the Common Stock. The Company can make no predictions as to the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of significant amounts of the Common Stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices. See "Risk Factors -- Shares Eligible for Future Sale; Registration Rights." REGISTRATION AGREEMENT In connection with the Recapitalization in December 1996, the stockholders of the Company at such time (the "Original Stockholders") entered into a Registration Agreement with the Company (the "Registration Agreement"). The Registration Agreement provides for certain demand registration rights to the Original Stockholders, and to subsequent holders of the Common Stock acquired by the Original Stockholders in connection with the Recapitalization. The demand registration rights commence from and after the 180th day after the closing of the Company's initial public offering of its securities. The holders of a majority of the registrable securities held by the Original Stockholders (and their permitted transferees) other than Leeway & Co. are entitled to request two long-form registrations in which the Company pays all registration expenses and an unlimited number of short-form registrations in which the Company pays all registration expenses. Such holders are also entitled to request an unlimited number of long-form registrations in which holders of registrable securities pay their pro-rata share of registration expenses. The holders of a majority of the registrable securities held by Leeway & Co. (and their permitted transferees) are entitled to request one long-form registration in which the Company pays all registration expenses and an unlimited number of long-form registrations in which the holders of registrable securities pay their share of registration expenses. The Company is entitled to postpone a demand registration for up to one year under certain circumstances, and is not required to effect a demand registration within one year of a previous registration in which holders of registrable securities participated without reduction of the number of their included shares. The Registration Agreement also provides that, subject to certain limitations, the Original Stockholders (and their permitted transferees) may request inclusion of their shares in a registration of securities by the Company (other than pursuant to the initial public offering of Common Stock or a demand registration). Expenses incurred in connection with the exercise of such piggyback registration rights are borne by the Company. 65 67 UNDERWRITING Subject to the terms and conditions contained in the Underwriting Agreement, the Underwriters named below (the "Underwriters") through their Representatives, BT Alex. Brown Incorporated, BancAmerica Robertson Stephens, Goldman, Sachs & Co., and The Robinson-Humphrey Company, LLC have severally agreed to purchase from the Company, the following respective numbers of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES ----------- --------- BT Alex. Brown Incorporated................................. BancAmerica Robertson Stephens.............................. Goldman, Sachs & Co......................................... The Robinson-Humphrey Company, LLC.......................... --------- Total............................................. 5,700,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all shares of the Common Stock offered hereby if any of such shares are purchased. The Company has been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 855,000 additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 5,700,000, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 5,700,000 shares are being offered. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. Subject to certain exceptions, the Company has agreed not to issue, offer, sell, sell short or otherwise dispose of any shares of Common Stock for a period of 180 days from the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. In addition, stockholders of the Company holding in the aggregate shares of Common Stock and options to purchase shares of Common Stock, have agreed not to offer or otherwise dispose of any such Common Stock for a period of 180 days from the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. See "Shares Eligible for Future Sale." 66 68 The Representatives have advised the Company that, pursuant to Regulation M under the Securities Exchange Act of 1934, as amended, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids which may have the effect of stabilizing, maintaining or otherwise affecting the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Underwriters in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Representatives of the Underwriters have advised the Company that the Underwriters do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock will be determined by negotiations among the Company and the Representatives of the Underwriters. Among the factors to be considered in such negotiations are prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies which the Company and the Representatives of the Underwriters believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Kirkland & Ellis, a partnership including professional corporations, Chicago, Illinois. Certain legal matters will be passed upon for the Underwriters by Alston & Bird LLP, Atlanta, Georgia. Certain matters relating to the conduct of the Company's business will be passed upon by Waller Lansden Dortch & Davis, A Professional Limited Liability Company, Nashville, Tennessee. EXPERTS The consolidated financial statements of Province Healthcare Company at December 31, 1996, and for the year then ended, appearing in this Prospectus and Registration Statement, and the related supplemental schedule included elsewhere in the Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements and schedule of Province Healthcare Company (formerly Brim, Inc.) as of December 31, 1995 and for the years ended December 31, 1994 and 1995 have been included herein and in the registration statement in reliance upon the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of Memorial Hospital Foundation for the years ended May 31, 1995 and 1996 and for the period June 1, 1996 through July 25, 1996 included in this Prospectus have been audited by Harrell, Rader, Bonner & Bolton, independent auditors, as set forth 67 69 in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. CHANGE IN ACCOUNTANTS In connection with the Recapitalization, the Company's board of directors approved the appointment of Ernst & Young LLP, independent auditors, as independent accountants for the Company, to replace KPMG Peat Marwick LLP, independent certified public accountants, whom the Company dismissed on December 18, 1996. During 1994 and 1995, and the period from January 1, 1996 through December 18, 1996, there were no disagreements with KPMG Peat Marwick LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure nor did KPMG Peat Marwick LLP's reports on the financial statements for such periods contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting. In connection with the filing of the Company's Registration Statement on Form S-1, KPMG Peat Marwick LLP was provided with a copy of this disclosure and was requested by the Company to furnish a letter addressed to the Commission stating whether they agree with the above statements. A copy of KPMG Peat Marwick LLP's letter to the Commission is filed as an exhibit to the Registration Statement on Form S-1. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 pursuant to the Securities Act with respect to the Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement, certain items of which are omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus as to the contents of any contract, agreement or other document filed with the Registration Statement as exhibits are necessarily summaries of such documents, and each such statement is qualified in its entirety by reference to the copy of the applicable document filed as an exhibit to the Registration Statement. For further information about the Company and the securities offered hereby, reference is made to the Registration Statement and to the consolidated financial statements, schedules and exhibits filed as a part thereof. Upon completion of the offering, the Company will be subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, will file reports and other information with the Commission. The Registration Statement, the exhibits and schedules forming a part thereof and the reports and other information filed by the Company with the Commission in accordance with the Exchange Act may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois, 60661-2511. Copies of such materials or any part thereof may also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains an Internet web site at http://www.sec.gov that contains reports, proxy statements and other information. 68 70 INDEX TO FINANCIAL STATEMENTS PROVINCE HEALTHCARE COMPANY Report of Independent Auditors.............................. F-2 Independent Auditors' Report................................ F-3 Consolidated Balance Sheets at December 31, 1995 and 1996... F-4 Consolidated Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996.......................... F-5 Consolidated Statements of Changes in Common Stockholders' Equity (Deficit) for the Years Ended December 31, 1994, 1995 and 1996............................................. F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996.......................... F-7 Notes to Consolidated Financial Statements.................. F-8 Condensed Consolidated Balance Sheet at June 30, 1997 (Unaudited)............................................... F-24 Condensed Consolidated Statements of Income for the Six Months Ended June 30, 1996 and 1997 (Unaudited)........... F-25 Condensed Consolidated Statement of Changes in Common Stockholders' Equity (Deficit) for the Six Months Ended June 30, 1997 (Unaudited)................................. F-26 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1996 and 1997 (Unaudited)........... F-27 Notes to Condensed Consolidated Financial Statements (Unaudited)............................................... F-28 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. Independent Auditors' Report................................ F-31 Consolidated Statements of Operations for the Years Ended May 31, 1995 and 1996 and for the period June 1, 1996 to July 25, 1996............................................. F-32 Consolidated Statements of Cash Flows for the Years Ended May 31, 1995 and 1996 and for the period June 1, 1996 to July 25, 1996............................................. F-33 Notes to the Consolidated Financial Statements.............. F-34 Independent Auditors' Report................................ F-38 Consolidated Balance Sheet at May 31, 1994.................. F-39 Consolidated Statement of Revenues and Expenses for the Year Ended May 31, 1994........................................ F-40 Consolidated Statement of Changes in Fund Balances for the Year Ended May 31, 1994................................... F-41 Consolidated Statement of Cash Flows for the Year Ended May 31, 1994.................................................. F-42 Notes to the Consolidated Financial Statements.............. F-43
F-1 71 REPORT OF INDEPENDENT AUDITORS Board of Directors Province Healthcare Company We have audited the accompanying consolidated balance sheet of Province Healthcare Company (formerly known as Brim, Inc. until January 16, 1997 and as Principal Hospital Company from January 16, 1997 until October , 1997) and subsidiaries as of December 31, 1996, and the related consolidated statements of operations, changes in common stockholders' equity (deficit), and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1996 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Province Healthcare Company and subsidiaries as of December 31, 1996, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Ernst & Young LLP Nashville, Tennessee April 30, 1997, except for Note 16, and Notes 1 and 17, as to which the dates are May 8, 1997 and October , 1997, respectively The foregoing report is in the form that will be signed upon the completion of the reincorporation described in Note 17 to the consolidated financial statements. Ernst & Young LLP Nashville, Tennessee October 8, 1997 F-2 72 INDEPENDENT AUDITORS' REPORT The Board of Directors Province Healthcare Company We have audited the accompanying consolidated balance sheet of Province Healthcare Company (formerly Brim, Inc.) and subsidiaries as of December 31, 1995, and the related consolidated statements of operations, changes in common stockholders' equity (deficit), and cash flows for the years ended December 31, 1994 and 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Province Healthcare Company (formerly Brim, Inc.) and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for the years ended December 31, 1994 and 1995, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Portland, Oregon March 8, 1996 F-3 73 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------- 1995 1996 ------- -------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 2,287 $ 11,256 Accounts receivable, less allowance for doubtful accounts of $2,078 in 1995 and $4,477 in 1996................... 18,286 22,829 Inventories............................................... 1,754 2,883 Prepaid expenses and other................................ 6,403 8,355 ------- -------- Total current assets.............................. 28,730 45,323 Property, plant and equipment, net.......................... 10,201 35,865 Other assets: Unallocated purchase price................................ -- 7,265 Investments in other health care-related businesses....... 4,564 423 Other..................................................... 3,580 5,149 ------- -------- 8,144 12,837 ------- -------- $47,075 $ 94,025 ======= ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 4,065 $ 7,915 Accrued salaries and benefits............................. 3,661 7,772 Accrued expenses.......................................... 2,128 5,359 Current maturities of long-term obligations............... 839 1,489 ------- -------- Total current liabilities......................... 10,693 22,535 Long-term obligations, less current maturities.............. 5,519 76,633 Third-party settlements..................................... 6,472 6,604 Other liabilities........................................... 909 3,349 ------- -------- 12,900 86,586 Mandatory redeemable preferred stock........................ 8,816 46,227 Common stockholders' equity (deficit): Common stock -- no par value; authorized 10,000,000 shares in 1995 and 20,000,000 in 1996; issued and outstanding 813,529 in 1995 and 7,280,020 in 1996.................. 414 3,276 Notes receivable for common stock......................... -- (391) Common stock warrant...................................... -- 139 Retained earnings (deficit)............................... 14,252 (64,347) ------- -------- 14,666 (61,323) ------- -------- $47,075 $ 94,025 ======= ========
See accompanying notes. F-4 74 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------ 1994 1995 1996 -------- -------- -------- (IN THOUSANDS) Revenue: Net patient service revenue............................... $ 78,109 $ 75,871 $104,325 Management and professional services...................... 15,969 19,567 18,937 Other..................................................... 7,989 5,776 6,593 -------- -------- -------- Net operating revenue............................. 102,067 101,214 129,855 -------- -------- -------- Expenses: Salaries, wages and benefits.............................. 53,659 55,289 65,704 Purchased services........................................ 16,879 14,411 19,485 Supplies.................................................. 11,035 10,143 13,115 Provision for doubtful accounts........................... 5,056 4,601 9,578 Other operating expenses.................................. 4,930 7,729 12,762 Rentals and leases........................................ 3,781 4,133 5,232 Depreciation and amortization............................. 1,530 1,771 2,813 Interest expense.......................................... 760 589 2,523 Costs of recapitalization................................. -- -- 11,570 Loss (gain) on sale of assets............................. (635) (2,814) 442 -------- -------- -------- Total expenses.................................... 96,995 95,852 143,224 -------- -------- -------- Income (loss) from continuing operations before provision for income taxes.......................................... 5,072 5,362 (13,369) Provision (benefit) for income taxes........................ 2,097 1,953 (4,464) -------- -------- -------- Income (loss) from continuing operations.................... 2,975 3,409 (8,905) Discontinued operations: (Loss) Income from discontinued operations, less applicable income taxes.............................................. (157) 783 537 (Loss) gain on disposal of discontinued operations -- to related parties in 1996, less applicable income taxes..... -- (1,047) 5,478 -------- -------- -------- Total discontinued operations................ (157) (264) 6,015 -------- -------- -------- Net income (loss)........................................... $ 2,818 $ 3,145 $ (2,890) ======== ======== ======== Preferred stock dividends and accretion..................... (172) -------- Net loss applicable to common and common equivalent shares.. $ (3,062) ======== Pro forma income (loss) per common and common equivalent share: Loss from continuing operations........................... $ (1.03) Income from discontinued operations....................... 0.68 -------- Net loss per common and common equivalent share........... $ (0.35) ======== Pro forma number of common and common equivalent shares..... 8,843 ========
See accompanying notes. F-5 75 PROVINCE HEALTHCARE COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT)
NOTES NO PAR VALUE RECEIVABLE COMMON STOCK FOR COMMON RETAINED ------------------ COMMON STOCK EARNINGS SHARES AMOUNT STOCK WARRANT (DEFICIT) TOTAL --------- ------ ---------- ------- --------- -------- (DOLLARS IN THOUSANDS) Balance at January 1, 1994...... 837,154 $ 824 $ -- $ -- $ 8,289 $ 9,113 Issuance of stock............. 33,490 546 -- -- -- 546 Retirement of stock........... (52,922) (837) -- -- -- (837) Net income.................... -- -- -- -- 2,818 2,818 --------- ------ ----- ---- -------- -------- Balance at December 31, 1994.... 817,722 533 -- -- 11,107 11,640 Issuance of stock............. 12,328 245 -- -- -- 245 Retirement of stock........... (16,521) (364) -- -- -- (364) Net income.................... -- -- -- 3,145 3,145 --------- ------ ----- ---- -------- -------- Balance at December 31, 1995.... 813,529 414 -- -- 14,252 14,666 Recapitalization transaction................ 6,466,491 2,862 (391) 139 (75,537) (72,927) Dividends and accretion....... -- -- -- -- (172) (172) Net loss...................... -- -- -- -- (2,890) (2,890) --------- ------ ----- ---- -------- -------- Balance at December 31, 1996.... 7,280,020 $3,276 $(391) $139 $(64,347) $(61,323) ========= ====== ===== ==== ======== ========
See accompanying notes. F-6 76 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------- 1994 1995 1996 ------- -------- -------- (IN THOUSANDS) OPERATING ACTIVITIES Net income (loss)........................................... $ 2,818 $ 3,145 $ (2,890) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................. 1,962 2,438 2,813 Other amortization........................................ -- -- 62 Provision for doubtful accounts........................... 5,076 4,734 9,578 Loss (income) from investments............................ 64 (86) 272 Deferred income taxes..................................... 278 (112) 4,628 Gain on sale of assets.................................... (361) (2,608) (8,519) Provision for professional liability...................... -- -- 1,700 Changes in operating assets and liabilities, net of effects from acquisitions and disposals: Accounts receivable..................................... (9,493) (5,269) (9,142) Inventories............................................. 124 (140) 43 Prepaid expenses and other current assets............... (408) 3,178 (6,587) Accounts payable and accrued expenses................... 1,044 (1,880) 5,610 Accrued salaries and benefits........................... -- -- 3,977 Third-party settlements................................. 1,693 62 244 Other liabilities....................................... (136) 232 (23) ------- -------- -------- Net cash provided by operating activities................... 2,661 3,694 1,766 INVESTING ACTIVITIES Purchase of property, plant and equipment................... (5,271) (1,398) (14,017) Net capital contributions and withdrawals -- investments.... (1,489) (2,063) 1,775 Purchase of acquired companies.............................. (4,364) (15,765) (24,946) Proceeds from sale of assets................................ 5,688 20,607 21,948 Sale of marketable securities............................... 1,031 -- -- Escrow deposit on facility purchase......................... 3,829 (3,829) -- Other....................................................... (138) 921 (2,104) ------- -------- -------- Net cash used in investing activities....................... (714) (1,527) (17,344) FINANCING ACTIVITIES Proceeds from long-term debt................................ 2,871 39 90,779 Repayments of debt.......................................... (5,185) (1,619) (31,875) Additions to deferred loan costs............................ -- -- (2,959) Issuance of common stock.................................... 546 245 -- Repurchase of common stock.................................. (837) (364) -- Recapitalization............................................ -- -- (31,398) ------- -------- -------- Net cash (used in) provided by financing activities......... (2,605) (1,699) 24,547 ------- -------- -------- Net (decrease) increase in cash and cash equivalents........ (658) 468 8,969 Cash and cash equivalents at beginning of year.............. 2,477 1,819 2,287 ------- -------- -------- Cash and cash equivalents at end of year.................... $ 1,819 $ 2,287 $ 11,256 ======= ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid during the year............................... $ 750 $ 1,435 $ 1,450 ======= ======== ======== Income taxes paid during the year........................... $ 1,842 $ 4,183 $ 2,288 ======= ======== ======== ACQUISITIONS Fair value of assets acquired............................... $ 4,632 $ 15,784 $ 37,228 Liabilities assumed......................................... (268) (19) (12,282) ------- -------- -------- Cash paid................................................... $ 4,364 $ 15,765 $ 24,946 ======= ======== ======== SALE OF ASSETS Assets sold................................................. $ 5,364 $ 17,791 $ 13,274 Liabilities released........................................ -- 505 155 Debt assumed by purchaser................................... (37) (297) -- Gain on sale of assets...................................... 361 2,608 8,519 ------- -------- -------- Cash received............................................... $ 5,688 $ 20,607 $ 21,948 ======= ======== ======== NONCASH TRANSACTIONS Property, plant and equipment acquired through capital leases.................................................... $ -- $ -- $ 2,761 ======= ======== ======== Noncash issuance of stock in connection with recapitalization.......................................... $ -- $ -- $ 4,118 ======= ======== ======== Dividends and accretion..................................... $ -- $ -- $ 172 ======= ======== ========
See accompanying notes. F-7 77 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 1. ORGANIZATION Province Healthcare Company (formerly known as Brim, Inc. until January 16, 1997 and as Principal Hospital Company from January 16, 1997 until October , 1997) and subsidiaries (the Company) are engaged in the business of owning, leasing and managing hospitals in non-urban communities principally in the northwestern and southwestern United States. As more fully described in Note 3, Brim, Inc. consummated a leveraged recapitalization on December 18, 1996. 2. ACCOUNTING POLICIES BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and partnerships in which the Company or one of its subsidiaries is a general partner and has a controlling interest. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS Cash equivalents include all highly liquid investments with an original maturity of three months or less when acquired. The Company places its cash in financial institutions that are federally insured and limits the amount of credit exposure with any one financial institution. PATIENT ACCOUNTS RECEIVABLE The Company's primary concentration of credit risk is patient accounts receivable, which consist of amounts owed by various governmental agencies, insurance companies and private patients. The Company manages the receivables by regularly reviewing its accounts and contracts and by providing appropriate allowances for uncollectible amounts. Significant concentrations of gross patient accounts receivable at December 31, 1996, consist of receivables from Medicare and Medicaid of 29% and 17%, respectively. Concentration of credit risk relating to accounts receivable is limited to some extent by the diversity and number of patients and payors and the geographic dispersion of the Company's operations. INVENTORIES Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated on the basis of cost. Routine maintenance and repairs are charged to expense as incurred. Expenditures that increase values, change capacities or extend useful lives are capitalized. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Amortization of equipment under capital leases is included in the provision for depreciation. F-8 78 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER ASSETS Deferred loan costs are included in other noncurrent assets and are amortized over the term of the related debt by the interest method. At December 31, 1996, deferred loan costs and accumulated amortization were $2,959,000 and $62,000, respectively. RISK MANAGEMENT The Company maintains self-insured medical and dental plans for employees. Claims are accrued under these plans as the incidents that give rise to them occur. Unpaid claim accruals are based on the estimated ultimate cost of settlement, including claim settlement expenses, in accordance with an average lag time and past experience. The Company has entered into reinsurance agreements for certain plans with independent insurance companies to limit its losses on claims. Under the terms of these agreements, the insurance companies will reimburse the Company based on the level of reinsurance which ranges from $30,000 per individual claim up to $1,000,000. These reimbursements are included in salaries, wages and benefits in the accompanying consolidated statements of operations. The Company is insured for professional liability based on a claims-made policy purchased in the commercial insurance market. The provision for professional liability and comprehensive general liability claims include estimates of the ultimate costs for claims incurred but not reported, in accordance with actuarial projections based on past experience. Management is aware of no potential professional liability claims whose settlement, if any, would have a material adverse effect on the Company's consolidated financial position or results of operations. OTHER NONCURRENT LIABILITIES Other noncurrent liabilities consist primarily of insurance liabilities, including an estimated liability for incurred but not reported professional liability claims, supplemental deferred compensation liability and minority interests in net assets of subsidiaries. PATIENT SERVICE REVENUE Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Estimated settlements under third-party reimbursement agreements are accrued in the period the related services are rendered and adjusted in future periods as final settlements are determined. Approximately 61%, 61% and 62% of gross patient service revenue for the years ended December 31, 1994, 1995 and 1996, is from participation in the Medicare and state sponsored Medicaid programs. Laws and regulations governing the Medicare and Medicaid programs are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing. While no such regulatory inquiries have been made, compliance with such laws and regulations can be subject to future government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare and Medicaid programs. MANAGEMENT AND PROFESSIONAL SERVICES Management and professional services is comprised of fees from management and professional consulting services provided to third-party hospitals pursuant to management contracts and F-9 79 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) consulting arrangements. Also included are reimbursable expenses which relate to salaries and benefits paid by the Company on behalf of the managed hospitals. Fees are recognized as revenue as services are performed. Reimbursable expenses are included in salaries, wages and benefits in the accompanying consolidated statements of operations. Management and professional services, excluding reimbursable expenses, were $9,048, $10,652 and $9,623 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company does not maintain any ownership interest in these managed hospitals. STOCK BASED COMPENSATION The Company, from time to time, grants stock options for a fixed number of common shares to employees. The Company accounts for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants when the exercise price of the options equals, or is greater than, the market price of the underlying stock on the date of grant. INTEREST RATE SWAP AGREEMENTS The Company enters into interest rate swap agreements as a means of managing its interest rate exposure. The differential to be paid or received is recognized over the life of the agreement as an adjustment to interest expense. PRO FORMA NET (LOSS) INCOME PER SHARE Pro forma net loss per share for the year ended December 31, 1996 is computed using the weighted average number of shares of common stock outstanding during the period, including dilutive common equivalent shares from stock options and warrants (using the treasury stock method). The 7,280,020 common shares issued in the recapitalization and the merger of a subsidiary of Brim into PHC of Delaware, Inc. (see Note 3) in December 1996 have been included in the pro forma calculation as if the recapitalization had occurred as of the first day of 1996. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, all other common stock issued, and common stock options and warrants granted, by the Company at prices below the initial public offering price during the twelve-month period prior to the initial public offering have been included in the calculation as if they were outstanding for the full fiscal year (using the treasury stock method). Historical net (loss) income per share has not been presented in these financial statements, since the historical capitalization of the Company is not meaningful due to the change in the capital structure of the Company resulting from the recapitalization (see Note 3). RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) No. 128, Earnings per Share and SFAS No. 129, Disclosure of Information about Capital Structure. These statements are effective for periods ending after December 15, 1997. SFAS No. 128 establishes standards for computing and presenting earnings per share. This Statement simplifies the standards for computing earnings per share and requires dual presentation of basic and diluted earnings per share on the face of the statement of operations and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. The adoption of SFAS No. 128 would have had no impact on the calculation of earnings per share assuming the calculation F-10 80 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was modified (i) to treat the 7,280,020 shares issued in the recapitalization and the merger in December 1996 as being outstanding for the entire period presented, and (ii) to treat all other common stock issued, and common stock options and warrants granted, by the Company at prices below the initial public offering price during the twelve-month period prior to the initial public offering as if they were outstanding for the entire period presented. SFAS No. 129 establishes standards for disclosing information about a company's capital structure. The adoption of SFAS No. 129 is not expected to materially alter disclosures presently being provided. RECLASSIFICATIONS Certain reclassifications have been made in the 1994 and 1995 consolidated financial statements to conform to the 1996 presentation. These reclassifications had no effect on the results of operations previously reported. 3. RECAPITALIZATION On December 18, 1996, Brim was recapitalized pursuant to an Investment Agreement dated November 21, 1996, by and between Brim and Golder, Thoma, Cressey, Rauner Fund IV, L.P. (GTCR) and PHC of Delaware, Inc. (PHC). Prior to the recapitalization, Brim was owned by certain of its officers and employees. PHC was founded in February 1996 by GTCR and Mr. Martin Rash, and was controlled by GTCR through an 82.1% common stock ownership. Following the recapitalization of Brim, GTCR controlled both Brim and PHC, and merged a subsidiary of Brim into PHC as discussed below. The combination of Brim and PHC was accounted for as a merger of businesses under common control. The basic elements of the December 1996 recapitalization of the Company included the following: GTCR Fund IV and other investors purchased new shares of the Company's common and preferred stock. The Company sold its senior living business and entered into a new credit facility to, along with the proceeds from the sale of the new shares, provide financing for the redemption of a portion of the pre-existing common and preferred stock; this pre-existing common and preferred stock was redeemed; and certain pre-existing debt was repaid. The recapitalization was accounted for as such and, accordingly, did not result in a new basis of accounting. Upon completion of the recapitalization, GTCR Fund IV controlled the Company and also controlled PHC, a company unrelated to Brim that GTCR Fund IV founded in February 1996. Since both companies are engaged in the business of owning, leasing and managing hospitals in non-urban communities, GTCR Fund IV then merged PHC into Brim so that the two companies would be under the same corporate structure and management. The principal elements of the recapitalization included the following: - Brim sold for cash its two wholly-owned subsidiaries engaged in senior living activities for a gross sales price of $19.7 million, and sold for cash certain real estate properties for a price of $406,500. - GTCR purchased 1,425,333 shares, Mr. Rash purchased 22,889 shares, Mr. Richard Gore purchased 42,667 shares, two banks purchased 21,333 shares, and Leeway & Co., a subsidiary of AT&T, purchased 833,778 shares of Brim newly-designated common stock for cash of approximately $1.1 million. Messrs. Rash and Gore purchased 399,902 shares of Brim newly-designated common stock for notes of $179,956. - Through a series of transactions, Brim pre-transaction shareholders who were to remain shareholders after the recapitalization received 3,580 shares of newly-designated junior F-11 81 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) preferred stock and 795,562 shares of Brim newly-designated common stock in exchange for their common stock of Brim. - GTCR purchased 6,414 shares, Mr. Rash purchased 103 shares, Mr. Gore purchased 192 shares, two banks purchased 96 shares and Leeway & Co. purchased 3,752 shares of newly-designated redeemable junior preferred stock for cash of approximately $10.6 million. - Leeway & Co. purchased 20,000 shares of newly designated redeemable senior preferred stock and was issued a warrant to purchase 343,265 shares of newly-designated common stock for total cash consideration of $20.0 million. A value of $139,000 was assigned to the warrant. - Brim entered into a $100.0 million credit facility with First Union National Bank and borrowed $35.0 million under the term loan portion of the facility, and $37.0 million under the $65.0 million revolving credit portion of the facility. - The outstanding common stock of all Brim shareholders who were not to remain as shareholders after the recapitalization was exchanged for redeemable junior preferred stock. The preferred stock was then redeemed for cash of approximately $42.3 million, and outstanding stock options were settled for cash of approximately $8.0 million. - Brim redeemed pre-existing Series A preferred stock held by General Electric Credit Corporation for cash of approximately $29.9 million. - Existing Brim debt of $5.4 million was paid. - An aggregate of approximately $6.5 million was deposited into escrow accounts for possible breaches of representations and warranties in connection with the transactions for sale of the Senior Living subsidiaries and the stock redemption. Escrow funds not used for settlement of breaches within 18 months of the recapitalization will be released to the purchasers of the Senior Living subsidiaries and the redeemed Brim shareholders. The principal elements of transactions occurring immediately after the recapitalization included the following: - A subsidiary of Brim was merged into PHC. In exchange for their shares in PHC, the PHC shareholders received newly-designated redeemable junior preferred stock and newly designated common stock as follows: GTCR received 13,580 and 3,017,779 shares, Mr. Rash received 217 and 429,252 shares, Mr. Gore received 407 and 247,258 shares, and two banks received 199 and 44,267 shares, respectively. - Existing PHC debt of $19.6 million was repaid. - First Additional Investment -- An agreement was entered into granting GTCR the right to acquire, at its sole discretion, up to 2,733 shares of the Company's redeemable junior preferred stock at a price of $1,000 per share, and up to 607,334 shares of the Company's common stock at a price of $0.45 per share, at any time through December 17, 1999. The agreement provides that Leeway & Co., Mr. Rash, Mr. Gore, and the two banks are obligated to purchase redeemable junior preferred stock and common stock in specified amounts at the same per share prices in the event GTCR exercises its right to acquire junior preferred and common stock. (See Note 17.) - Second Additional Investment -- The agreement discussed immediately above also granted GTCR the right to acquire up to 4,545 shares of the Company's redeemable junior preferred stock at a price of $1,000 per share, and up to 1,010,000 shares of the Company's common stock at a price of $0.45 per share, at any time after the date upon which the investment F-12 82 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) discussed above was completed and before December 17, 1998. The agreement also granted Leeway & Co. the right to acquire senior preferred stock, redeemable junior preferred stock, common stock, and a common stock warrant, and granted Mr. Rash and Mr. Gore the right to acquire common stock, in specified amounts at the same per share prices in the event GTCR exercises its right to acquire junior preferred and common stock. (See Note 17.) - Brim changed its name to Principal Hospital Company. The common stock ownership subsequent to the recapitalization and the merger of a subsidiary of Brim into PHC consists of a 10.9% interest held by certain of the pre-recapitalization Brim shareholders, 61.0% held by GTCR, 11.5% held by Leeway & Co., 15.7% held by Messrs. Rash and Gore, and 0.9% held by two banks. Total financing fees and legal, accounting and other related costs of the recapitalization amounted to approximately $16,850,000. Costs totaling $11,570,000 were charged to operations at the date of the recapitalization, consisting of cash paid to buy-out stock options of $7,995,000, severance costs of $2,190,000, and transaction-related costs of $1,385,000. Costs of $2,321,000 associated with the sale of common and preferred stock were allocated to retained earnings (deficit) as to the common stock, and were netted against the proceeds as to the preferred stock. Financing costs of $2,959,000 associated with the credit facility with First Union National Bank were recorded as deferred loan costs. As part of the recapitalization, the Company approved a plan in December 1996, to terminate certain employees, which included approximately 200 corporate and hospital operating personnel. The Company accrued approximately $2,190,000 of severance liability relating to these approved terminations as of December 31, 1996 and included these costs in the costs of the recapitalization in the accompanying consolidated statements of operations. The majority of the terminations occurred subsequent to year-end and were paid. 4. ACQUISITIONS AND DIVESTITURES In February 1995, the Company acquired two senior living residences for approximately $15,800,000. In September 1995, the Company sold the real property of the two facilities and leased them back under an operating lease agreement for a minimum lease term of 15 years. The gain on the sale of $138,000 was deferred and will be recognized over the lease term. In May 1995, the Company sold a hospital facility for approximately $6,000,000. Cash proceeds from the sale were approximately $5,200,000 and the Company recorded a gain on this transaction of approximately $2,500,000. In February 1996, the Company acquired Parkview Regional Hospital by entering into a 15-year operating lease agreement with two five-year renewal terms and by purchasing certain assets totaling $3,092,000 and assuming certain liabilities totaling $1,329,000, for a purchase price of $1,763,000. In July 1996, the Company purchased certain assets totaling $26,394,000 and assumed certain liabilities totaling $3,211,000 of Memorial Mother Frances Hospital for a purchase price of $23,183,000. In October 1996, the Company acquired Starke Memorial Hospital by assuming certain liabilities and entering into a capital lease agreement and by purchasing certain net assets for a purchase price of $7,742,000. The Company is waiting for the final appraisal on certain assets acquired, thereby resulting in the allocation of the purchase price not being finalized. The Company anticipates this to be completed in the third-quarter of 1997. Management does not expect the final F-13 83 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) allocation of the purchase price to have a significant impact on the Company's consolidated financial position or results of operations. In December 1996, the Company sold its senior living business (see Note 11). All of the foregoing acquisitions were accounted for using the purchase method of accounting. The operating results of the acquired companies have been included in the accompanying consolidated statements of operations from the respective dates of acquisition. The following pro forma information related to continuing operations reflects the operations of the entities acquired in 1995 and 1996, and divested in 1995, as if the respective transactions had occurred as of the first day of the fiscal year immediately preceding the year of the transactions. The pro forma results of continuing operations do not purport to represent what the Company's results of continuing operations would have been had such transactions in fact occurred at the beginning of the years presented or to project the Company's results of operations in any future period.
YEAR ENDED DECEMBER 31, ------------------------------ 1994(1) 1995(2) 1996(3) -------- -------- -------- (IN THOUSANDS) Total revenue............................................... $101,976 $151,215 $153,136 Income (loss) from continuing operations.................... 3,363 (704) (10,332)
- --------------- (1) Excludes the hospital divested in 1995. (2) Includes Parkview Regional Hospital, Memorial Mother Frances Hospital and Starke Memorial Hospital, and excludes the hospital divested in 1995. (3) Includes Parkview Regional Hospital, Memorial Mother Frances Hospital and Starke Memorial Hospital. The Company has minority interests in various health care related businesses. These investments are accounted for by the equity method. The assets, liabilities and results of operations of these businesses are not material to the consolidated financial statements. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
DECEMBER 31, ------------------ 1995 1996 ------- ------- (IN THOUSANDS) Land........................................................ $ 823 $ 1,340 Leasehold improvements...................................... 1,315 4,475 Buildings and improvements.................................. 3,300 19,121 Equipment................................................... 8,654 15,217 ------- ------- 14,092 40,153 Less allowances for depreciation and amortization........... (4,609) (4,818) ------- ------- 9,483 35,335 Construction-in-progress (estimated cost to complete at December 31, 1996 -- $1,427).............................. 718 530 ------- ------- $10,201 $35,865 ======= =======
Assets under capital leases were $2,400,000 and $13,385,000 net of accumulated amortization of $750,000 and $1,462,000 at December 31, 1995 and 1996, respectively. F-14 84 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. LONG-TERM OBLIGATIONS Long-term obligations consist of the following:
DECEMBER 31, ----------------- 1995 1996 ------ ------- (IN THOUSANDS) Revolving credit agreement.................................. $ 400 $37,000 Term loan................................................... -- 35,000 Other debt obligations...................................... 111 87 Mortgage notes paid in full in 1996, interest ranging from 7.5% - 8.0%............................................... 3,401 -- Various notes paid in full in 1996, interest ranging from 7.0% - 10.0%.............................................. 478 -- ------ ------- 4,390 72,087 Obligations under capital leases (see Note 12).............. 1,968 6,035 ------ ------- 6,358 78,122 Less current maturities..................................... (839) (1,489) ------ ------- $5,519 $76,633 ====== =======
In connection with the recapitalization (see Note 3), the Company entered into a $100 million credit facility in December 1996, consisting of a revolving credit agreement in an amount of up to $65,000,000 and a term loan in the amount of $35,000,000. There was $37,000,000 of borrowings outstanding under the revolving credit agreement and $35,000,000 under the term loan at December 31, 1996. Future borrowings under the revolver are limited, in certain instances, to acquisitions of identified businesses. At December 31, 1996, the Company had additional borrowing capacity available under the revolver of approximately $6,250,000. The loans under the credit agreement bear interest, at the Company's option, at the adjusted base rate or at the adjusted LIBOR rate. Interest ranged from 8.09% to 9.25% during 1996. The Company pays a commitment fee of one-half of one percent on the unused portion of the revolving credit agreement. The Company may prepay the principal amount outstanding under the revolving credit agreement at any time before the maturity date of December 16, 1999. The term loan is payable in quarterly installments ranging from $1,250,000 commencing in the second quarter of 1998 to $2,250,000 in 2002, plus one payment of $2,000,000 in 2002. The Company has a standby letter of credit issued and outstanding with the bank totaling $603,000. Amounts outstanding are applied against the credit availability under the Company's revolving credit agreement. In certain circumstances, the Company is required to make mandatory prepayments of the term loan and revolver to the extent of (i) 100% of net proceeds from the issuance of equity securities in excess of $25,000,000, provided however that in connection with a qualified initial public offering of the Company's common stock, the Company shall only be required to make a mandatory prepayment in an amount equal to the first $20,000,000 of net cash proceeds; (ii) 100% of the net proceeds of any debt issued; and (iii) 100% of net proceeds from asset sales other than sales of obsolete equipment in the ordinary course of business or insurance proceeds. The credit facility limits, under certain circumstances, the Company's ability to incur additional indebtedness, including contingent obligations; sell material assets; retire, redeem or otherwise reacquire its capital stock; acquire the capital stock or assets of another business; or pay dividends. The credit facility also requires the Company to maintain a specified net worth and meet or exceed F-15 85 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) certain coverage, leverage, and indebtedness ratios. Indebtedness under the credit facility is secured by substantially all assets of the Company. Subsequent to year end, as required by the credit facility, the Company entered into an interest rate swap agreement, which effectively converted for a three-year period $35.0 million of floating-rate borrowings to fixed-rate borrowings. This interest rate swap agreement will be used to manage the Company's interest rate exposure. The agreement is a contract to periodically exchange floating interest rate payments for fixed interest rate payments over the life of the agreement. The Company secured a 8.77% fixed interest rate. The Company is exposed to credit losses in the event of non-performance by the counterparty to its financial instruments. The Company anticipates that the counterparty will be able to fully satisfy its obligations under the contract. Aggregate maturities of long-term obligations at December 31, 1996, excluding capital leases, are as follows (in thousands): 1997........................................................ $ 47 1998........................................................ 3,790 1999........................................................ 42,750 2000........................................................ 6,750 2001........................................................ 7,750 Thereafter.................................................. 11,000 ------- $72,087 =======
7. MANDATORY REDEEMABLE PREFERRED STOCK Redeemable preferred stock consists of the following:
1995 1996 ------ ------- (IN THOUSANDS) Series A redeemable senior preferred stock -- $1,000 per share stated value, authorized no shares in 1995 and 25,000 in 1996, issued and outstanding no shares in 1995 and 20,000 in 1996, net of issuance costs of $892,000 and a warrant of $139,000 in 1996............................. $ -- $18,969 Series B redeemable junior preferred stock -- $1,000 per share stated value, authorized no shares in 1995 and 50,000 in 1996, issued and outstanding no shares in 1995 and 28,540 shares in 1996, net of issuance costs of $1,282,000 in 1996........................................ -- 27,258 Redeemable Series A preferred stock, no par value, authorized, issued and outstanding 96,000 shares in 1995 and no shares in 1996, net of issuance costs of $784,000 in 1995................................................... 8,816 -- ------ ------- $8,816 $46,227 ====== =======
As described in Note 3, the Company redeemed all of the existing preferred stock and issued two new categories of preferred stock as part of the recapitalization on December 18, 1996. The issued and outstanding shares of Series A redeemable senior preferred stock are held by Leeway & Co., who purchased 20,000 shares and a warrant to purchase 343,265 shares of common stock for $20.0 million in connection with the recapitalization (see Note 3). Issuance costs totaled $892,000. Series A redeemable preferred stock pays cumulative preferential dividends which accrue on a daily basis at the rate of 11% and are payable in cash when and as declared by the board of directors. The issue is senior to all other classes of equity and has a liquidation preference equal to F-16 86 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the purchase price plus all accrued dividends. The issue requires mandatory redemption after nine years for par value plus accrued but unpaid dividends. The Company may redeem part or all of the issue at any time for a liquidation preference of 105% for years one through five, 103% for year six, and 100% thereafter. Notwithstanding the foregoing, the redemption price is the stated value, plus accrued but unpaid dividends, for redemptions in connection with an initial public offering. The issued and outstanding Series B redeemable junior preferred stock consists of 19,994 shares issued to GTCR, 320 shares issued to Mr. Rash, 599 shares issued to Mr. Gore, and 295 shares issued to two banks for consideration of $21,208,000; 3,752 shares purchased by Leeway & Co. for $3,752,000; and 3,580 shares issued to Brim pre-recapitalization shareholders with a value of $3,580,000. Issuance costs totaled $1,282,000. Series B redeemable junior preferred stock pays cumulative preferential dividends which accrue on a daily basis at the rate of 8% and are payable in cash when and as declared by the board of directors. The issue is senior to all other classes of equity other than the senior preferred stock, and has a liquidation preference equal to the purchase price plus all accrued but unpaid dividends. The issue requires mandatory redemption after 10 years for the stated value plus accrued but unpaid dividends. The preferred stock does not have voting rights, and the Series A senior preferred stock is fully transferable in whole or in part to other financial institutions. The purchase agreements for preferred stock restrict the Company's ability to incur additional indebtedness, and restrict payment of dividends, redemption of securities, acquisition and merger activity, sale of a majority of assets, and the creation of unrelated businesses. 8. STOCKHOLDERS' EQUITY AND STOCK OPTIONS STOCK OPTIONS In prior years, the Company had granted nonstatutory stock options to employees under plans existing in those years. The 161,941 stock options outstanding under these plans were cashed-out for $7,995,000 in connection with the recapitalization (see Note 3) in December 1996. Details of stock option activity and pro forma information related to stock options granted in prior years have not been presented in these financial statements since such information would not be meaningful due to the change in the capital structure of the Company resulting from the recapitalization. At December 31, 1996, the Company did not have a stock option plan in place, and no stock options were outstanding. Subsequent to year-end, stock options were granted to certain officers and employees (see Note 17). WARRANT In connection with the recapitalization in December 1996, the Company issued a warrant to purchase 343,265 shares of its common stock. The warrant has an exercise price of $0.045 per share and has a twelve-year term. 9. PATIENT SERVICE REVENUE The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: - Medicare -- Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per diagnosis. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Inpatient nonacute F-17 87 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) services, certain outpatient services and medical education costs related to Medicare beneficiaries are paid based on a cost reimbursement methodology. The Company is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the Company and audits thereof by the Medicare fiscal intermediary. The Company's classification of patients under the Medicare program and the appropriateness of their admission are subject to an independent review. The Company's Medicare cost reports have been audited by the Medicare fiscal intermediary through December 31, 1993. - Medicaid -- Inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed either under contracted rates or reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports by the Company and audits thereof by Medicaid. The Company's Medicaid cost reports have been audited by the Medicaid fiscal intermediary through December 31, 1993. - Other -- The Company also has entered into payment agreements with certain commercial insurance carriers, health maintenance organizations and preferred provider organizations. The basis for payment to the Company under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. Final determination of amounts earned under the Medicare and Medicaid programs often occur in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions. Adjustments from finalization of prior year cost reports from both Medicare and Medicaid resulted in an increase in patient service revenue of $788,000 for the year ended December 31, 1996. 10. INCOME TAXES The provision for income tax expense (benefit) attributable to income from continuing operations consists of the following amounts:
DECEMBER 31, --------------------------- 1994 1995 1996 ------ ------ ------- (IN THOUSANDS) Current: Federal............................................. $1,519 $1,580 $ 586 State............................................... 300 334 139 ------ ------ ------- 1,819 1,914 725 Deferred: Federal............................................. 238 31 (4,190) State............................................... 40 8 (999) ------ ------ ------- 278 39 (5,189) ------ ------ ------- $2,097 $1,953 $(4,464) ====== ====== =======
F-18 88 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences between the Company's effective income tax rate of 41.3%, 36.4% and 33.4% from continuing operations for 1994, 1995 and 1996, respectively, and the statutory federal income tax rate of 34.0% are as follows:
DECEMBER 31, --------------------------- 1994 1995 1996 ------ ------ ------- (IN THOUSANDS) Statutory federal rate................................ $1,724 $1,823 $(4,545) State income taxes, net of federal income tax benefit............................................. 224 226 (568) Amortization of goodwill.............................. 61 69 16 Change in valuation allowance......................... 54 (141) (1) Nondeductible merger costs............................ -- -- 298 Other................................................. 34 (24) 336 ------ ------ ------- $2,097 $1,953 $(4,464) ====== ====== =======
The components of the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31, -------------------------- 1994 1995 1996 ------ ------ ------ (IN THOUSANDS) Deferred tax assets -- current: Accounts and notes receivable........................ $ 491 $ 544 $3,305 Accrued vacation liability........................... 674 692 710 Accrued liabilities.................................. 187 121 1,924 Other................................................ -- 2 -- ------ ------ ------ Net deferred tax assets--current....................... $1,352 $1,359 $5,939 ====== ====== ====== Deferred tax assets--noncurrent: Depreciation of property, plant and equipment........ $ 107 $ 232 $ 464 Net operating losses from separate return subsidiary........................................ 421 280 278 Accrued liabilities.................................. 204 218 41 Deferred revenue..................................... -- 42 -- ------ ------ ------ 732 772 783 Less valuation allowance............................... (421) (280) (278) ------ ------ ------ Deferred tax assets -- noncurrent...................... 311 492 505 Deferred tax liabilities -- other...................... -- (76) (41) ------ ------ ------ Net deferred tax assets -- noncurrent.................. $ 311 $ 416 $ 464 ====== ====== ======
In the accompanying consolidated balance sheets, net current deferred tax assets and net noncurrent deferred tax assets are included in prepaid expenses and other, and other assets, respectively. The decrease in the valuation allowance for deferred tax assets for the years ended December 31, 1994, 1995 and 1996 was $54,000, $141,000 and $2,000, respectively. The Company had net operating loss carryforwards (NOLs) of approximately $714,000 at December 31, 1996 related to a subsidiary that has not been included in the consolidated federal income tax return. These NOLs will expire beginning in 2009. Due to restrictions on the use of the NOLs under the Internal Revenue Code, management believes there is a risk they may expire unused and, accordingly, has established a valuation reserve against the tax benefit of the NOLs. Management believes it is more likely than not that the remaining deferred tax assets will ultimately be realized through future taxable income from operations. F-19 89 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Internal Revenue Service is in the process of finalizing its examination of the Company's federal income tax returns for the 1993 and 1994 years. The examination resulted in temporary differences with a tax effect of approximately $2,148,000 being reclassified from deferred taxes to currently payable liabilities in the December 31, 1996 balance sheet. Finalization of the examination is not expected to have a significant impact on the results of operations of the Company. 11. DISCONTINUED OPERATIONS During May 1995, the Company adopted a plan to dispose of its business of providing managed care administration and organization infrastructure to physician groups taking health care payment risk. Revenue from this business segment was $2,169,000 and $1,126,000 for the years ended December 31, 1994 and 1995, respectively. Loss from operations of this business segment was $678,000 and $146,000 for the years ended December 31, 1994 and 1995, respectively, net of taxes. The loss on the disposal of this business segment was $670,000 net of taxes. During September 1995, the Company adopted a plan to dispose of its stand-alone business of providing surgery on an outpatient basis. Revenue from this business segment was $91,000 and $155,000 for the years ended December 31, 1994 and 1995, respectively. Loss from operations of this business segment was $221,000 and $249,000 for the years ended December 31, 1994 and 1995, respectively, net of taxes. Loss on disposal of this business was $377,000, net of taxes. During November 1996, the Company adopted a plan to sell its senior living business to companies whose shareholders included unrelated third parties and certain shareholders, officers, and employees of Brim. This business segment was sold on December 18, 1996. Revenue from this business segment was $12,478,000, $19,422,000 and $18,598,000 for the years ended December 31, 1994, 1995 and 1996, respectively. Income from operations was $742,000, $1,178,000 and $537,000, net of taxes, for the years ended December 31, 1994, 1995 and 1996, respectively. The gain on the disposal of this business segment was $5,478,000, net of taxes. For financial reporting purposes, the results of operations and cash flows of the discontinued businesses are included in the consolidated financial statements as discontinued operations. The income (loss) from discontinued operations may be summarized as follows:
1994 1995 1996 ----- ------- ------ (IN THOUSANDS) (Loss) income from discontinued operations........... $(256) $ 1,284 $ 891 Applicable income taxes.............................. (99) 501 354 ----- ------- ------ (157) 783 537 (Loss) gain on disposal of discontinued operations... -- (1,715) 8,961 Applicable income taxes.............................. -- (668) 3,483 ----- ------- ------ - (1,047) 5,478 ----- ------- ------ Total...................................... $(157) $ (264) $6,015 ===== ======= ======
12. LEASES The Company leases various buildings, office space and equipment. The leases expire at various times and have various renewal options. These leases are classified as either capital leases or operating leases based on the terms of the respective agreements. F-20 90 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum payments at December 31, 1996, by year and in the aggregate, under capital leases and noncancellable operating leases with terms of one year or more consist of the following:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) 1997........................................................ $ 1,830 $ 4,043 1998........................................................ 1,819 3,371 1999........................................................ 1,531 2,666 2000........................................................ 642 2,278 2001........................................................ 663 1,784 Thereafter.................................................. 1,139 5,831 ------- ------- Total minimum lease payments................................ 7,624 $19,973 ======= Amount representing interest................................ (1,589) ------- Present value of net minimum lease payments (including $1,442 classified as current)........ $ 6,035 =======
13. CONTINGENCIES The Company is involved in litigation and regulatory investigations arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, these matters will be resolved without material adverse effect on the Company's consolidated financial position or results of operations. 14. RETIREMENT PLANS The Company sponsors defined contribution employee benefit plans which cover substantially all employees. Employees may contribute a percentage of eligible compensation subject to Internal Revenue Service limits. The plans call for the Company to make matching contributions, based on either a percentage of employee contributions or a discretionary amount as determined by the Company. Contributions by the Company to the plans totaled $355,000, $394,000 and $497,000 for the years ended December 31, 1994, 1995 and 1996, respectively. In January 1995, the Company adopted a nonqualified supplemental deferred compensation plan for selected management employees. As determined by the Board of Directors, the Plan provides a benefit of 1% to 3% of the employee's compensation. The participant's amount is fully vested, except in those instances where the participant's employment terminates for any reason other than retirement, death or disability, in which case the participant forfeits a portion of the employer's contribution depending on length of service. Plan expense totaled $80,000 and $99,000 for the years ended December 31, 1995 and 1996, respectively. 15. FAIR VALUES OF FINANCIAL INSTRUMENTS Cash and Cash Equivalents:--The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. Accounts Receivable and Accounts Payable:--The carrying amount reported in the balance sheet for accounts receivable and accounts payable approximates fair value. Long-Term Debt:--The carrying amount reported in the balance sheet for long-term obligations approximates fair value. The fair value of the Company's long-term obligations is estimated using F-21 91 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. 16. STOCK SPLIT On May 8, 1997, the Company declared a three-for-one stock split of the outstanding common stock and common stock options and warrant to shareholders of record on May 8, 1997. All post-recapitalization common share and per share data, included in the accompanying consolidated financial statements and footnotes thereto, have been restated to reflect this stock split. 17. SUBSEQUENT EVENTS STOCK OPTIONS In March 1997, the Company's Board of Directors approved a stock option plan (the Plan) under which options to purchase common stock may be granted to officers, employees, and directors. Options are granted at no less than market price on the date of grant. Under the Plan, 1,300,000 shares have been reserved for grant. The Company's Board of Directors approved the issuance of options to acquire 385,765 common shares in March 1997, at an exercise price of $3.375 per share. The options granted vest and are exercisable ratably over a five-year period. Shares available for grant total 914,235. STOCK SALE In July 1997, GTCR exercised its right, obtained in December 1996, as a part of the recapitalization transaction (see Note 3), to make the First Additional Investment and purchase shares of the Company's redeemable junior preferred stock at $1,000 per share and common stock at $0.45 per share. GTCR acquired 2,733 shares of redeemable junior preferred stock and 607,334 shares of common stock thereunder. As discussed in Note 3, Leeway & Co., Mr. Rash, Mr. Gore, and the two banks were obligated to purchase specified amounts of redeemable junior preferred stock and common stock at the same per share prices in the event GTCR exercised its right to acquire redeemable junior preferred stock and common stock and, accordingly, purchased 1,022 shares of redeemable junior preferred stock and 350,891 shares of common stock. Net proceeds from the stock sale totaled $4,182,000. In connection with the anticipated public offering of its common stock, the rights of GTCR, Leeway & Co., Mr. Rash, and Mr. Gore, to purchase stock of the Company pursuant to the Second Initial Investment will be terminated with no purchases being made. (See Note 3.) NOTES RECEIVABLE FOR COMMON STOCK In July 1997, the Company was paid $211,200 of the notes receivable for common stock with a balance of $391,000 at December 31, 1996. ACQUISITIONS Effective August 1, 1997, the Company acquired Needles Desert Community Hospital by entering into a 15-year lease agreement with three five-year renewal terms and by purchasing assets totaling $1,840,000 and assuming certain liabilities totaling $583,000 for a purchase price of $1,257,000. F-22 92 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PUBLIC OFFERING OF COMMON STOCK On August 27, 1997, the Company filed a Registration Statement under the Securities Act of 1933 for a public offering of common stock. The net proceeds from the offering are planned to be used to reduce the balance of the outstanding term and revolving credit loans, redeem the outstanding balance of the Series A redeemable senior preferred stock plus accrued dividends, and repurchase approximately 1,000,000 shares of common stock held by GTCR and Leeway & Co. In connection with the offering, the Series B redeemable junior preferred stock will be converted into common stock. The conversion will be effected at the public offering price of the common stock. EXERCISE OF WARRANT On September 12, 1997, Leeway & Co. exercised its warrant to purchase 343,265 shares of the Company's common stock. The warrant had an exercise price of $0.045 per share, resulting in total proceeds to the Company of $15,447. (See Note 8.) REINCORPORATION On October , 1997, the Company changed its jurisdiction of incorporation to Delaware, changed its name to Province Healthcare Company, and exchanged 1.35 shares of its no par common stock for each share of its $0.01 par value common stock. All post-recapitalization common share and per share data, included in the consolidated financial statements and footnotes thereto, have been restated to reflect this reincorporation. F-23 93 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1997 -------------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 6,016 Accounts receivable, less allowance for doubtful accounts of $6,816.............................................. 28,292 Inventories............................................... 3,203 Prepaid expenses and other................................ 7,274 -------- Total current assets.............................. 44,785 Property, plant and equipment, net.......................... 39,066 Other assets: Unallocated purchase price................................ 6,822 Investments in other health care-related businesses....... 544 Other..................................................... 5,636 -------- 13,002 -------- $ 96,853 ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 7,982 Accrued salaries and benefits............................. 5,085 Accrued expenses.......................................... 5,451 Current maturities of long-term obligations............... 1,640 -------- Total current liabilities......................... 20,158 Long-term obligations, less current maturities.............. 78,436 Third-party settlements..................................... 5,984 Other liabilities........................................... 6,243 -------- 90,663 Mandatory redeemable preferred stock........................ 46,340 Common stockholders' equity (deficit): Common stock, no par value, authorized 20,000,000; issued and outstanding 7,280,020.............................. 3,276 Notes receivable for common stock......................... (391) Common stock warrant...................................... 139 Retained deficit.......................................... (63,332) -------- (60,308) -------- $ 96,853 ========
See accompanying notes. F-24 94 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ----------------- 1996 1997 ------- ------- (IN THOUSANDS) Revenue: Net patient service revenue............................... $43,391 $69,581 Management and professional services...................... 9,630 8,398 Other..................................................... 5,269 2,882 ------- ------- Net operating revenue....................................... 58,290 80,861 ------- ------- Expenses: Salaries, wages and benefits.............................. 28,784 33,802 Purchased services........................................ 8,518 10,314 Supplies.................................................. 5,256 7,832 Provision for doubtful accounts........................... 2,804 5,901 Other operating expenses.................................. 4,655 8,377 Rentals and leases........................................ 2,556 2,881 Depreciation and amortization............................. 893 2,492 Interest expense.......................................... 847 3,941 Loss (gain) on sale of assets............................. 106 (159) ------- ------- Total expenses.............................................. 54,419 75,381 ------- ------- Income from continuing operations before provision for income taxes.............................................. 3,871 5,480 Provision for income taxes.................................. 1,846 2,081 ------- ------- Income from continuing operations........................... 2,025 3,399 Income from discontinued operations, less applicable income taxes..................................................... 182 -- ------- ------- Net income.................................................. $ 2,207 $ 3,399 ======= ======= Preferred stock dividends and accretion..................... -- (2,384) ------- ------- Net income applicable to common and common equivalent shares.................................................... $ 2,207 $ 1,015 ======= ======= Pro forma net income per common and common equivalent share: Income from continuing operations......................... $ 0.23 $ 0.11 Income from discontinued operations....................... .02 -- ------- ------- Net income per common and common equivalent share......... $ 0.25 $ 0.11 ======= ======= Pro forma number of common and common equivalent shares..... 8,843 8,843 ======= =======
See accompanying notes. F-25 95 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
NO PAR VALUE NOTES COMMON STOCK RECEIVABLE FOR COMMON RETAINED ------------------ COMMON STOCK EARNINGS SHARES AMOUNT STOCK WARRANT (DEFICIT) TOTAL --------- ------ -------------- ------- --------- -------- (DOLLARS IN THOUSANDS) Balance at December 31, 1996...................... 7,280,020 $3,276 $(391) $139 $(64,347) $(61,323) Net income................ -- -- -- -- 3,399 3,399 Dividends and accretion... -- -- -- -- (2,384) (2,384) --------- ------ ----- ---- -------- -------- Balance at June 30, 1997.... 7,280,020 $3,276 $(391) $139 $(63,332) $(60,308) ========= ====== ===== ==== ======== ========
See accompanying notes. F-26 96 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------ 1996 1997 ------- ------- (IN THOUSANDS) NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES......... $ 7,442 $(1,543) INVESTING ACTIVITIES Purchase of property, plant and equipment................... (3,184) (5,530) Net capital contributions and withdrawals -- investments.... (1,721) (121) Purchase of acquired companies.............................. (1,763) -- ------- ------- Net cash used in investing activities....................... (6,668) (5,651) FINANCING ACTIVITIES Proceeds from long-term debt................................ 622 2,833 Repayments of debt.......................................... (714) (879) Issuance of common stock.................................... 587 -- Repurchase of common stock.................................. (166) -- ------- ------- Net cash provided by financing activities................... 329 1,954 ------- ------- Net increase (decrease) in cash and cash equivalents........ 1,103 (5,240) Cash and cash equivalents at beginning of period............ 2,287 11,256 ------- ------- Cash and cash equivalents at end of period.................. $ 3,390 $ 6,016 ======= ======= ACQUISITIONS Fair value of assets acquired............................... $ 3,092 $ -- Liabilities assumed......................................... (1,329) -- ------- ------- Cash paid................................................... $ 1,763 $ -- ======= ======= SALE OF ASSETS Assets sold................................................. $ -- $ 399 Liabilities released........................................ -- (582) Gain on sale of assets...................................... -- 183 ------- ------- Cash paid................................................... $ -- $ -- ======= ======= NONCASH TRANSACTIONS Property, plant and equipment acquired through capital leases.................................................... $ 322 $ -- ======= =======
See accompanying notes. F-27 97 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1997, are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included herein. 2. PRO FORMA NET INCOME PER SHARE Pro forma net income per share is computed using the weighted average number of shares of common stock outstanding during the period, including dilutive common equivalent shares from stock options and warrants (using the treasury stock method). The 7,280,020 common shares issued in the recapitalization and the merger in December 1996 have been included in the pro forma calculation as if the recapitalization had occurred as of the first day of 1996. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletins, all other common stock issued, and common stock options and warrants granted, by the Company at prices below the initial public offering price during the twelve-month period prior to the initial public offering have been included in the calculation as if they were outstanding for the full fiscal year (using the treasury stock method). Historical net income per share has not been presented in these financial statements for the six months ended June 30, 1996 since the historical capitalization of the Company is not meaningful due to the change in the capital structure of the Company resulting from the recapitalization. 3. CONTINGENCIES Management continually evaluates contingencies based on the best available evidence and believes that adequate provision for losses has been provided to the extent necessary. In the opinion of management, the ultimate resolution of the following contingencies will not have a material effect on the Company's results of operations or financial position. GENERAL AND PROFESSIONAL LIABILITY RISKS The reserve for the self-insured portion of general and liability and professional liability risks is included in "Other liabilities" and is based on actuarially determined estimates. LITIGATION The Company currently, and from time to time, is expected to be subject to claims and suits arising in the ordinary course of business. NET PATIENT SERVICE REVENUE Final determination of amounts earned under the Medicare and Medicaid programs often occurs in subsequent years because of audits by the programs, rights of appeal and the application of numerous technical provisions. F-28 98 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) FINANCIAL INSTRUMENTS On March 10, 1997, as required by the credit facility, the Company entered into an interest rate swap agreement, which effectively converted for a five-year period $35 million of floating rate borrowings to fixed rate borrowings. Interest rate swap agreements are used on a limited basis to manage the Company's interest rate exposure. The agreements are contracts to periodically exchange fixed and floating interest rate payments over the life of the agreements. The floating-rate payments are based on LIBOR and fixed-rate payments are dependent upon market levels at the time the swap agreement was consummated. For the six months ended June 30, 1997 the Company received a weighted average rate of 5.56% and paid a weighted average rate of 6.27%. 4. STOCK OPTIONS In March 1997, the Company's Board of Directors approved a stock option plan (the Plan) under which options to purchase common stock may be granted to officers, employees, and directors. Options are granted at no less than market price on the date of grant. Under the Plan, 1,300,000 shares have been reserved for grant. The Company's Board of Directors approved the issuance of options to acquire 385,765 common shares in March 1997, at an exercise price of $3.375 per share. The options granted vest and are exercisable ratably over a five-year period. Shares available for grant total 914,235. 5. SUBSEQUENT EVENTS STOCK SALE In July 1997, GTCR exercised its right, obtained in December 1996, as a part of the recapitalization transaction, to make the First Additional Investment and purchase shares of the Company's redeemable junior preferred stock at $1,000 per share and common stock at $0.45 per share. GTCR acquired 2,733 shares of redeemable junior preferred stock and 607,334 shares of common stock thereunder. As discussed in Note 3, Leeway & Co., Mr. Rash, Mr. Gore, and the two banks were obligated to purchase specified amounts of redeemable junior preferred stock and common stock at the same per share prices in the event GTCR exercised its right to acquire redeemable junior preferred stock and common stock and, accordingly, purchased 1,022 shares of redeemable junior preferred stock and 350,891 shares of common stock. Net proceeds from the stock sale totaled $4,182,000. In connection with the anticipated public offering of its common stock, the rights of GTCR, Leeway & Co., Mr. Rash, and Mr. Gore, to purchase stock of the Company pursuant to the Second Initial Investment will be terminated with no purchases being made. NOTES RECEIVABLE FOR COMMON STOCK In July 1997, the Company was paid $211,200 of the notes receivable for common stock with a balance of $391,000 at December 31, 1996. ACQUISITIONS Effective August 1, 1997, the Company acquired Needles Desert Community Hospital by entering into a 15-year lease agreement with three five-year renewal terms and by purchasing assets totaling $1,840,000 and assuming certain liabilities totaling $583,000 for a purchase price of $1,257,000. F-29 99 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (UNAUDITED) PUBLIC OFFERING OF COMMON STOCK On August 27, 1997, the Company filed a Registration Statement under the Securities Act of 1933 for a public offering of common stock. The net proceeds from the offering are planned to be used to reduce the balance of the outstanding term and revolving credit loans, redeem the outstanding balance of the Series A redeemable senior preferred stock plus accrued dividends, and repurchase approximately 1,000,000 shares of common stock held by GTCR and Leeway & Co. In connection with the offering, the Series B redeemable junior preferred stock will be converted into common stock. The conversion will be effected at the public offering price of the common stock. EXERCISE OF WARRANT On September 12, 1997, Leeway & Co. exercised its warrant to purchase 343,265 shares of the Company's common stock. The warrant had an exercise price of $0.045 per share, resulting in total proceeds to the Company of $15,447. REINCORPORATION On October , 1997, the Company changed its jurisdiction of incorporation to Delaware, changed its name to Province Healthcare Company, and exchanged 1.35 shares of its no par common stock for each share of its $0.01 par value common stock. All post-recapitalization common share and per share data, included in the consolidated financial statements and footnotes thereto, have been restated to reflect this reincorporation. F-30 100 INDEPENDENT AUDITORS' REPORT To the Board of Directors Memorial Hospital Foundation -- Palestine, Inc. We have audited the accompanying consolidated statements of operations and cash flows for the years ended May 31, 1995 and 1996 and the period June 1, 1996 to July 25, 1996, of Memorial Hospital Foundation -- Palestine, Inc. and subsidiaries. These consolidated financial statements are the responsibility of the Foundation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Memorial Hospital Foundation -- Palestine, Inc. and subsidiaries for the years ended May 31, 1995 and 1996 and the period June 1, 1996 to July 25, 1996, in conformity with generally accepted accounting principles. HARRELL, RADER, BONNER & BOLTON, LLP Palestine, Texas July 25, 1997 F-31 101 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31, PERIOD -------------------------- JUNE 1, 1996 1995 1996 TO JULY 25, 1996 ----------- ----------- ---------------- Revenue: Net patient service revenue.................. $27,964,228 $24,882,638 $3,565,113 Other........................................ 610,515 704,921 100,876 ----------- ----------- ---------- Total revenue........................ 28,574,743 25,587,559 3,665,989 Expenses: Salaries, wages and benefits................. 11,885,884 10,579,605 1,439,896 Purchased services........................... 2,351,178 2,642,919 312,960 Supplies..................................... 3,138,923 2,602,732 338,320 Professional services........................ 2,003,004 1,590,450 242,199 Rentals and leases........................... 508,653 531,669 69,252 Depreciation and amortization................ 2,615,183 3,293,552 431,964 Interest expense............................. 1,445,917 1,604,811 227,696 Provision for doubtful accounts.............. 3,677,053 3,410,640 584,387 Litigation settlements....................... 3,784,554 1,737,963 52,671 Other expense................................ 4,523,566 3,785,922 621,554 ----------- ----------- ---------- Total expenses....................... 35,933,915 31,780,263 4,320,899 ----------- ----------- ---------- Excess of expenses over revenue...... $(7,359,172) $(6,192,704) $ (654,910) =========== =========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-32 102 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31, PERIOD ------------------------- JUNE 1, 1996 1995 1996 TO JULY 25, 1996 ----------- ----------- ---------------- OPERATING ACTIVITIES Excess of expenses over revenue..................... $(7,359,172) $(6,192,704) $(654,910) Adjustments to reconcile excess of expenses over revenue to net cash provided (used) by operating activities: Depreciation and amortization..................... 2,615,183 3,293,552 431,964 Provision for doubtful accounts................... 3,677,053 3,410,640 584,387 Noncash litigation settlement..................... 1,757,157 -- -- Changes in operating assets and liabilities: Accounts receivable............................. (3,777,174) (1,379,544) (832,103) Inventories..................................... (20,037) 151,318 24,548 Prepaid expenses and other...................... 29,978 166,558 (178,515) Accounts payable................................ 1,458,165 128,492 542,093 Accrued salaries and benefits................... 183,309 286,469 92,698 Third party settlements......................... (1,569,855) 1,213,444 384,578 Litigation settlements.......................... 1,975,000 (100,000) -- Other liabilities............................... 134,003 432,508 378,802 ----------- ----------- --------- Net cash provided (used) by operating activities.... (896,390) 1,410,733 773,542 INVESTING ACTIVITIES Purchases of property, plant and equipment.......... (3,542,689) (430,683) (119,084) (Purchase) sale of marketable securities............ (323,394) 323,394 -- Increase in other assets............................ (994,300) (124,491) -- Reduction (increase) in cash invested in assets whose use is limited.............................. 4,829,978 249,302 (216,182) ----------- ----------- --------- Net cash provided (used) by investing activities.... (30,405) 17,522 (335,266) FINANCING ACTIVITIES Proceeds from long-term debt........................ 1,505,435 140,255 -- Principal payments on long-term debt................ (126,752) (388,928) (59,528) Principal payments on capital leases................ (1,190,028) (1,025,043) (190,198) Decrease in retainage and construction payable...... (1,544,649) -- -- ----------- ----------- --------- Net cash provided (used) by financing activities.... (1,355,994) (1,273,716) (249,726) =========== =========== ========= Net increase (decrease) in cash and cash equivalents....................................... (2,282,789) 154,539 188,550 Cash and cash equivalents at beginning of year...... 2,486,450 203,661 358,200 ----------- ----------- --------- Cash and cash equivalents at end of year............ $ 203,661 $ 358,200 $ 546,750 =========== =========== ========= SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the period................... $ 1,691,602 $ 1,718,399 $ 45,731 =========== =========== ========= NONCASH TRANSACTIONS: Property, plant and equipment acquired through capital leases.................................. $ 2,662,290 $ -- $ -- =========== =========== ========= Property, plant and equipment transferred to Anderson County -- net.......................... $ 1,757,157 $ -- $ -- =========== =========== =========
The accompanying notes are an integral part of these consolidated financial statements. F-33 103 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED MAY 31, 1995 AND 1996 AND THE PERIOD JUNE 1, 1996 TO JULY 25, 1996 1. ORGANIZATION Memorial Hospital Foundation -- Palestine, Inc. (Foundation) is a not-for-profit corporation which provides hospital and related health care services to citizens of Anderson County and the immediate surrounding area. The Foundation has two wholly owned for profit subsidiaries. In September 1988, the Foundation leased from Anderson County the County's hospital facilities. The lease term was for fifteen years and provided for the transfer of all assets and liabilities of the County hospital for a nominal fee. In July 1994, the Foundation moved from the County facility into a new hospital facility. See Note 9, Subsequent Events, for a discussion of the July 1996 sale of all health care facilities, the return of the County hospital, and termination of the County lease. The accompanying financial statements reflect the results of operations and cash flows of the Foundation prior to the July 26, 1996 sale. 2. ACCOUNTING POLICIES Basis of Consolidation. The consolidated financial statements of the Foundation include the accounts of Memorial Hospital Foundation -- Palestine, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents. For purposes of the statement of cash flows, the Foundation considers certificates of deposit having a maturity of three months or less to be cash equivalents. Depreciation and amortization. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, which range from 10 to 40 years for buildings and improvements and an average of 10 years for equipment. Amortization of equipment under capital leases is included in the provision for depreciation and amortization. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation is eliminated from the respective accounts and any related gain or loss is included in operations. Compensated absences. In accordance with the Financial Accounting Standards Board Statement No. 43, Accounting For Compensated Absences, the Foundation accrues vacations, holidays, sick days and personal days when earned by the employees. Risk management. The Foundation is insured for professional liability and general liability based on a claims-made policy purchased in the commercial insurance market. The provision for professional liability and comprehensive general liability claims includes estimates of the ultimate costs for claims incurred but not reported, in accordance with actuarial projections based on past experience. Management is aware of no potential liability claims whose settlement, if any, would have a material adverse effect on the Foundation's financial position or results of operations. The Foundation maintains self-insured medical and dental plans for employees. Claims are accrued under these plans as the incidents that give rise to them occur. Unpaid claim accruals are based on the estimated ultimate cost of settlement, in accordance with an average lag time and past F-34 104 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) experience. The Foundation has entered into reinsurance agreements with independent insurance companies to limit its losses on claims. Patient service revenue. Patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including estimated retroactive adjustments under reimbursement agreements with third-party payors. Estimated settlements under third-party reimbursement agreements are accrued in the period the related services are rendered and adjusted in future periods as final settlements are determined. Income taxes. The Foundation is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from Federal income taxes on related income. East Texas Medical Management, Inc. and Benefit Solutions, Inc. are for-profit corporations and are subject to Federal income taxes on their taxable income. 3. THIRD-PARTY PAYOR SETTLEMENTS The Foundation has agreements with third-party payors that provide for payments to the Foundation at amounts different from its established rates. A summary of the payment arrangements with major third-party payors follows: - Medicare -- Inpatient acute care services rendered to Medicare program beneficiaries are paid at prospectively determined rates per diagnosis. These rates vary according to a patient classification system that is based on clinical, diagnostic, and other factors. Inpatient nonacute services and certain outpatient services are paid based on a cost reimbursement methodology. The Foundation is reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by the Medicare fiscal intermediary. Classification of patients under the Medicare program and the appropriateness of their admission are subject to an independent review. Medicare cost reports have been audited by the Medicare fiscal intermediary through May 31, 1994. - Medicaid -- Inpatient and outpatient services rendered to Medicaid program beneficiaries are reimbursed either under contracted rates or reimbursed for cost reimbursable items at a tentative rate with final settlement determined after submission of annual cost reports and audits thereof by Medicaid. Medicaid cost reports have been audited by the Medicaid fiscal intermediary through May 31, 1994. - Other -- The Foundation also has entered into payment agreements with certain commercial insurance carriers and preferred provider organizations. The basis for payment under these agreements includes prospectively determined rates per discharge, discounts from established charges, and prospectively determined daily rates. 4. RETIREMENT PLAN The Foundation has a qualified employee retirement savings plan covering all eligible employees. The Foundation makes "non-elective" contributions equal to 3% of compensation for eligible participants. In addition, the Foundation matches 100% of eligible participant contributions up to 3% of compensation. The Foundation reserves the right to change the amount of the employer contribution at any time. F-35 105 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Employee retirement plan expense for the years ended May 31, 1995 and 1996 and the period June 1, 1996 to July 25, 1996 was $263,649, $267,482 and $32,206, respectively. 5. LEASES The Foundation leases medical office space and equipment under noncancellable operating leases. At the date of sale (see Note 9), all capital and operating leases were either assumed by the purchaser or paid off shortly thereafter. 6. CHARITY CARE The Foundation provides medically necessary care to all patients who meet certain criteria under its charity care policy regardless of the patient's ability to pay. For the years ended May 31, 1995 and 1996 and the period June 1, 1996 to July 25, 1996, the Foundation provided $1,873,991, $1,591,300 and $298,445, respectively of uncompensated care based on charges foregone. 7. RELATED PARTY TRANSACTIONS In 1992, ETCHS, Inc., a non-profit corporation, was created and funded by the Foundation to provide community clinical health services. In 1996, $93,180 of the original funding was returned to the Foundation and ETCHS, Inc. was liquidated. In May 1995, the Foundation purchased, for its rural health clinics, the medical practice of a retiring physician who is a member of the Foundation Board of Trustees. The purchase price was $275,000. 8. LITIGATION AND CONTINGENCIES Prior to the sale of the health care facilities (see Note 9), the Foundation settled several claims as follows:
YEAR ENDED MAY 31, PERIOD ----------------------- JUNE 1, 1996 1995 1996 TO JULY 25, 1996 ---------- ---------- ---------------- Class action relating to termination of a pension plan in 1988..................... $1,275,000 $ -- $ -- Claims relating to termination of professional services and other contracts................................ -- 1,240,000 -- Claim by Anderson County relating to the lease of the former County hospital (includes net book value of plant, property and equipment transferred to the County).................................. 2,257,157 -- -- Claim challenging the Foundation's tax exempt status for property taxes......... 252,397 497,963 52,671 ---------- ---------- ------- Total............................ $3,784,554 $1,737,963 $52,671 ========== ========== =======
The Foundation is involved in additional litigation and regulatory investigations arising in the normal course of business. In the opinion of management, after consultation with legal counsel, F-36 106 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) these matters will be resolved without material adverse effect on the Foundation's consolidated financial position or results of operations. 9. SUBSEQUENT EVENTS On July 26, 1996, the Foundation completed the sale of all of its health care facilities, (except its West Oak Plaza medical office building), equipment, and inventories to Palestine Principal Healthcare Limited Partnership for $23,183,000, subject to adjustment. In 1997, the final adjustment was made resulting in a sales price of $22,957,000. In a separate but simultaneous transaction, the Foundation sold the West Oak Plaza medical office building and equipment to Mother Frances Regional Healthcare Center for $1,264,000. The purchasers paid cash or assumed certain Foundation liabilities. In related transactions, the Foundation (1) paid off all bond indebtedness at a discount of $758,224 and (2) returned the former County hospital facility to Anderson County and terminated the County lease. After July 25, 1996, the Foundation ceased operations as a healthcare provider and will use proceeds from the sale and from collection of receivables to liquidate the Foundation's liabilities. The Foundation has also terminated operations of its subsidiaries. F-37 107 INDEPENDENT AUDITORS' REPORT To the Board of Directors Memorial Hospital Foundation -- Palestine, Inc. We have audited the accompanying consolidated balance sheet of Memorial Hospital Foundation -- Palestine, Inc. and subsidiaries as of May 31, 1994, and the related consolidated statements of revenues and expenses, changes in fund balances and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Foundation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Memorial Hospital Foundation -- Palestine, Inc. and subsidiaries as of May 31, 1994, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. HARRELL, RADER, BONNER & BOLTON, LLP Palestine, Texas August 23, 1994 F-38 108 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. CONSOLIDATED BALANCE SHEET
MAY 31, 1994 ------------ ASSETS CURRENT ASSETS: Cash...................................................... $ 2,486,450 Assets whose use is limited -- required for current liabilities............................................. 564,354 Accounts receivable (less allowance for doubtful accounts of $2,836,779).......................................... 4,860,977 Inventories............................................... 607,173 Prepaid expenses.......................................... 45,650 Other assets.............................................. 78,106 ----------- Total current assets............................... $ 8,642,710 ASSETS WHOSE USE IS LIMITED OR RESTRICTED: Under indenture agreement................................. 6,824,308 Less assets whose use is limited and that are required for current liabilities..................................... 564,354 ----------- Noncurrent assets whose use is limited or restricted......................................... 6,259,954 PROPERTY, PLANT AND EQUIPMENT (at cost): Land...................................................... 190,119 Building.................................................. 4,604,194 Leasehold improvement..................................... 149,861 Equipment................................................. 11,862,969 Construction in progress.................................. 11,560,469 ----------- Total.............................................. 28,367,612 Less accumulated depreciation............................. 9,997,297 ----------- Net property, plant and equipment.................. 18,370,315 OTHER ASSETS: Notes receivable.......................................... 172,572 Deposits.................................................. 90,934 Certificates of deposit -- restricted..................... 100,000 Debt issue costs (less accumulated amortization of $34,117)................................................ 1,043,256 Start-up costs for new ventures (less accumulated amortization of $9,931)................................. 176,801 ----------- Total other assets................................. 1,583,563 ----------- Total assets....................................... $34,856,542 =========== LIABILITIES AND FUND BALANCE CURRENT LIABILITIES: Accounts payable.......................................... $ 1,038,135 Accrued expenses: Salaries and fees....................................... 774,063 Payroll taxes........................................... 32,219 Other................................................... 246,444 Retainage and construction accounts payable............... 1,544,649 Construction period interest payable...................... 379,113 Health insurance programs payable......................... 1,017,414 Current portion of long-term debt......................... 777,556 Current installments of obligations under capital leases.................................................. 830,547 ----------- Total current liabilities.......................... $ 6,640,140 Long-term debt -- less current portion...................... 16,267,349 Obligations under capital leases -- less current portion.... 894,399 Fund Balance................................................ 11,054,654 ----------- Total liabilities and fund balance................. $34,856,542 ===========
The accompanying notes are an integral part of these consolidated financial statements. F-39 109 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. CONSOLIDATED STATEMENT OF REVENUES AND EXPENSES
FOR THE YEAR ENDED MAY 31, 1994 GROSS PATIENT REVENUES...................................... $40,539,349 Less provisions for: Contractual allowance under health insurance programs..... $13,325,275 Uncollectible accounts.................................... 2,976,979 Charity allowances........................................ 1,209,347 ----------- Total revenue deductions.......................... 17,511,601 ----------- Net patient service revenue....................... 23,027,748 OTHER OPERATING REVENUE: Rent income............................................... 15,934 Insurance sales........................................... 13,111 Other income.............................................. 175,784 ----------- Total other operating revenue..................... 204,829 ----------- Total operating revenue........................... 23,232,577 OPERATING EXPENSES: Nursing services.......................................... 6,436,401 Other professional services............................... 6,364,052 General services.......................................... 1,742,113 Fiscal and administrative services........................ 6,622,316 Depreciation.............................................. 1,831,069 Rent property expense..................................... 29,158 Insurance sales expense................................... 63,014 ----------- Total operating expenses.......................... 23,088,123 ----------- Excess revenues over expenses from operations..... 144,454 NON OPERATING INCOME........................................ 95,783 ----------- Excess revenues over expenses..................... $ 240,237 ===========
The accompanying notes are an integral part of these consolidated financial statements. F-40 110 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. CONSOLIDATED STATEMENT OF CHANGES IN FUND BALANCES FOR THE YEAR ENDED MAY 31, 1994
UNRESTRICTED RESTRICTED FUNDS FUNDS TOTAL ------------ ---------- ----------- BALANCE, MAY 31, 1993.................................. $10,814,417 $ -- $10,814,417 Excess revenues over expenses for year ending May 31, 1994.............................................. 240,237 -- 240,237 ----------- -------- ----------- BALANCE, MAY 31, 1994.................................. $11,054,654 $ -- $11,054,654 =========== ======== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-41 111 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 1994 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Excess revenues over expenses............................. $ 240,237 Non-cash expenses: Depreciation........................................... 1,831,069 Amortization........................................... 9,931 (Increase) Decrease in: Accounts and notes receivable.......................... 168,173 Inventories............................................ (1,172) Prepaid expenses....................................... 152,913 Increase (Decrease) in: Accounts payable....................................... 223,038 Accrued expenses....................................... 227,734 Health insurance programs payable...................... (351,717) ------------ Net Cash provided by Operating Activities......... 2,500,206 CASH FLOWS FROM INVESTING ACTIVITIES: Investment in mutual fund................................. (78,106) Purchase of property, plant and equipment................. (12,480,673) Start-up costs for new ventures........................... (186,732) Increase in deposits...................................... (2,844) Investment of loan proceeds: Cash invested in assets whose use is limited........... (6,824,308) ------------ Net Cash used by Investing Activities............. (19,572,663) CASH FLOWS FROM FINANCING ACTIVITIES: SHORT-term borrowing -- retainage and construction accounts payable....................................... 1,923,762 Proceeds from issue of long-term debt net of $389,623 discount............................................... 16,020,377 Proceeds from bank loan................................... 734,882 Proceeds from capital leases.............................. 34,766 Payment of bond issue costs............................... (1,077,374) Principal payments on notes and bank loans................ (119,481) Principal payments on capital leases...................... (1,166,566) ------------ Net cash provided by financing activities......... 16,350,366 ------------ Net decrease in cash.............................. (722,091) ------------ Cash at beginning of period....................... 3,208,541 ------------ Cash at end of period............................. $ 2,486,450 ============ Supplemental Disclosure of Cash Flow Information Cash paid during the period for: Interest............................................... $ 870,523
The accompanying notes are an integral part of these consolidated financial statements. F-42 112 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MAY 31, 1994 SIGNIFICANT ACCOUNTING POLICIES Organization. Memorial Hospital Foundation -- Palestine, Inc. (Foundation) is a not-for-profit acute care hospital. The Foundation renders care to patients primarily from Anderson County and the immediate surrounding area. The Foundation grants credit to patients who qualify according to the Foundation's criteria. On September 21, 1988, Anderson County entered into a 15 year lease agreement with the Foundation that provided for the Foundation to lease and operate Anderson County Memorial Hospital (Hospital). The lease was effective as of September 22, 1988, and provided for the transfer of all Hospital assets and liabilities to the Foundation in exchange for a nominal fee. The lease also contains a 10 year renewal option exercisable at the sole discretion of the Foundation. The consolidated financial statements of the Foundation include the accounts of East Texas Medical Management, Inc. and Benefit Solutions, Inc. Benefit Solutions, Inc. is a wholly owned subsidiary of East Texas Medical Management, Inc., which is a wholly owned subsidiary of the Foundation. All significant intercompany transactions and accounts have been eliminated in consolidation. Concentrations of credit risk. Financial instruments that potentially subject the Foundation to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. The Foundation places its temporary cash accounts and investments with local financial institutions. As of May 31, 1994, the Foundation had $1,332,995 on deposit in excess of federally insured limits. Concentrations of credit risk with respect to accounts receivable are derived from providing services and granting credit to patients, substantially all of whom are area residents. Cash and cash equivalents. For purposes of the statement of cash flows, the Foundation considers certificates of deposit having a maturity of three months or less to be cash equivalents. Allowance for doubtful accounts. The allowance for doubtful accounts and the corresponding provision for uncollectible accounts charged against earnings is based on prior years' history and an evaluation of current year receivables. Recoveries of amounts written off in prior years are shown as a reduction of the provision for uncollectible accounts in the year of recovery. Inventories. Inventories, consisting of materials and expendable supplies, are valued at the lower of cost or market, determined on the first-in, first-out basis. Property, plant and equipment. Depreciation on these assets is calculated using the straight-line method over the estimated useful life of the asset which ranges from 3 to 50 years. Depreciation expense was $1,831,069 in 1994. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged against income as incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation is eliminated from the respective accounts and any related gain or loss is included in income. Amortizable assets. Amortization on deferred costs is calculated using the straight-line method. Bond issue costs are amortized over 25 years and are being capitalized during the construction period as part of the cost of constructing a new primary health care facility. Bond issue cost capitalized during the year was $34,117. Start-up costs are generally amortized using the straight-line method over 60 months. Start-up cost expensed in 1994 was $9,931. F-43 113 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Compensated absences. In accordance with the Financial Accounting Standards Board Statement No. 43, Accounting for Compensated Absences, the Foundation accrues vacations, holidays, sick days and personal days when earned by the employees. Medical malpractice. The Foundation is covered for medical malpractice by a claims-made insurance policy. The potential exists for losses above the limits established in the policy. However, any potential losses cannot be reasonably estimated and no provision is made for such loss accruals. The Foundation intends to maintain its coverage for medical malpractice by continued renewal of the claims-made policy. The Foundation has also purchased a tail-coverage policy to cover Anderson County for any claims made related to incidents occurring prior to the transfer of the Hospital to the Foundation. Income taxes. The Foundation is a not-for-profit corporation as described in Section 501(c)(3) of the Internal Revenue Code and is exempt from Federal income taxes on related income pursuant to Section 501(a) of the Code. The Foundation is classified by the Internal Revenue Service as one that is not a private foundation and qualifies for the charitable contribution deduction under Section 170(b)(1)(A)(iii) of the Internal Revenue Code. East Texas Medical Management, Inc. and Benefit Solutions, Inc. are for-profit corporations and are subject to Federal income taxes on their taxable income. Provisions are made for deferred income tax as a result of timing differences between financial and taxable income. There are presently no differences between financial and taxable income. HEALTH INSURANCE PROGRAMS RECEIVABLE/PAYABLE Health Insurance Programs Receivable/Payable are amounts due from or to third-party payers under Title XVIII -- Medicare and Title XIX -- Medicaid reimbursement agreements. Such amounts are determined using a Statement of Reimbursable Costs as follows: Title XVIII -- Medicare -- (payable)........................ $(1,140,277) Title XIX -- Medicaid -- receivable......................... 122,863 ----------- Payable........................................... $(1,017,414) ===========
The total unallowable charges to health insurance program patients are adjusted by the amount determined on the Statement of Reimbursable Costs and shown as contractual allowance under health insurance programs on the Statements of Revenues and Expenses. The amounts due under these programs are subject to audit and retroactive adjustments by the third-party payers. ASSETS WHOSE USE IS LIMITED OR RESTRICTED At May 31, 1994, the Foundation had certain funds whose use is limited, as follows: Construction fund........................................... $4,654,575 Interest fund............................................... 564,354 Reserve fund................................................ 1,605,379 ---------- 6,824,308 Less funds required for current liabilities................. 564,354 ---------- Net............................................... $6,259,954 ==========
F-44 114 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The construction fund is limited to payment of construction costs of a new primary health care facility the Foundation is constructing. The interest fund is limited to payment of interest as it comes due on the indebtedness undertaken for the construction of the new primary health care facility. The reserve fund is limited to payment of principal and interest as they come due on the indebtedness in the event other available funds, including the interest fund, are insufficient to meet the payments due. CERTIFICATE OF DEPOSIT -- PLEDGED Pursuant to the Foundation's agreement with the City of Palestine to operate the City's ambulance service, the Foundation is required to post a $100,000 ambulance performance bond. In lieu of that bond, the Foundation purchased a certificate of deposit at First State Bank in Frankston, Texas and has pledged the certificate of deposit, which matures August 30, 1994, to the City of Palestine. The Foundation plans to continue to renew this arrangement. LONG-TERM DEBT -- LESS CURRENT PORTION Long-term debt at May 31, 1994, consisted of the following: Note payable to bank, interim financing, due August 1, 1994, including interest at an adjustable rate of the Wall Street Journal prime plus 1.5%, collateralized by a building. ................................................ $ 734,882 Note payable to corporation, dated August 15, 1993, principal due each August 15, beginning in 1996 in varying amounts, interest due at February 15 and August 15 of each year beginning in 1994 at 7.25% through August 15, 2003 and at 7.8% beginning February 15, 2004 till final maturity at August 15, 2018. Collateralized by substantially all assets of the Foundation, excluding real property not on the site of the new primary health care facility being constructed from the proceeds of the note payable. ................................................. 16,032,066 Note payable to individual, in monthly installments of $1,969 including interest at 8.5%, with the final installment due at August 17, 2007, collateralized by a building. ................................................ 187,531 Note payable to supplier, in monthly installments of $3,544 including interest at 10.5%, with the final installment due at October 29, 1996, collateralized by equipment. .... 90,426 ----------- Total long-term debt.............................. 17,044,905 Less current portion........................................ 777,556 ----------- LONG-TERM DEBT -- less current portion............ $16,267,349 ===========
F-45 115 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Maturities of long-term debt in each of the next five years and thereafter are as follows: 1995....................................................... $ 777,556 1996....................................................... 47,198 1997....................................................... 311,741 1998....................................................... 320,315 1999....................................................... 341,227 Thereafter................................................. 15,246,868 ----------- Total............................................ $17,044,905 ===========
During August 1993, East Texas Hospital Facilities Development Corporation, an organization created for the purpose of issuing tax exempt revenue bonds, issued bonds in the amount of $16,410,000. East Texas Hospital Facilities Development Corporation in turn loaned the proceeds from the bond issue to the Foundation to finance the construction of the Foundation's new primary health care facility. Total interest incurred for the year ended May 31, 1994, was $1,249,635, of which $1,010,936 was capitalized and $238,699 was expensed. RETIREMENT PLAN On November 1, 1988, the Foundation established a qualified employee retirement savings plan covering all eligible employees. The Foundation makes "non-elective" contributions equal to 3% of compensation for eligible participants. In addition, the Foundation matches 100% of eligible participant contributions up to 3% of compensation. The Foundation reserves the right to change the amount of the employer contribution at any time. Employee retirement plan expense for the year ended May 31, 1994 was $292,329. LEASE COMMITMENTS Capital leases The Foundation has entered into agreements to lease certain hospital equipment. The leases, which expire over the next four years, are noncancelable and are classified as capital leases. At May 31, 1994, property recorded under capitalized leases was as follows: Equipment................................................... $4,870,604 Less accumulated amortization............................... 3,198,851 ---------- Total property.................................... $1,671,753 ==========
Noncancelable operating lease The Foundation leases medical office space and equipment and the leases are classified as noncancelable operating leases. F-46 116 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The future minimum lease payments by year and in the aggregate amount under capitalized leases and under noncancelable operating leases with initial or remaining noncancelable lease terms in excess of one year, consisted of the following at May 31, 1994.
NONCANCELABLE CAPITALIZED OPERATING LEASES LEASES ----------- ------------- 1995........................................................ $ 914,149 $ 53,342 1996........................................................ 594,198 50,942 1997........................................................ 334,474 50,942 1998........................................................ 4,173 45,718 1999........................................................ 3,825 8,167 Thereafter.................................................. -- -- ---------- -------- Total minimum payments due.................................. 1,850,819 209,111 Amounts representing interest............................... 125,873 -- ---------- -------- Present value of net minimum lease payments................. $1,724,946 $209,111 ========== ========
Amortization expense and accumulated amortization on capital leases are included with depreciation expense and accumulated depreciation for the year ended May 31, 1994. Certain capital leases provide for purchase options. Generally, purchase options are at prices representing the expected fair value of the property at the expiration of the lease term. CHARITY ALLOWANCE The Foundation provides health care regardless of ability to pay. Charity care provided during the year ended May 31, 1994, amounted to $1,209,347. RELATED PARTY TRANSACTIONS In May 1992, ETCHS, Inc., a non-profit corporation, was created to provide community clinical health services on an ability-to-pay basis. On August 17, 1992, the Foundation purchased a building for $250,000. It is anticipated the building will be used by ETCHS, Inc. to provide community clinical health services. ETCHS, Inc. had not commenced operations as of May 31, 1994. The Foundation contracts with a corporation, of which a former board member is a stockholder, to provide holter monitoring services and physician recruiting services. The Foundation paid $27,125 for holter monitoring services and $132,850 as reimbursement to the corporation for physician recruitment services and physician income guarantees, during the former board member's 1994 term. On June 25, 1993, the Foundation purchased a building for $156,000 from a board member. The building is rented to physicians for office space. CONTINGENCIES In July 1992, three former employees of the Foundation filed a class action suit alleging that, in 1988, the Foundation wrongfully reclaimed funds previously contributed to a defined benefit retirement plan (plan) terminated in 1988. The suit asks for actual and punitive damages totaling $11,000,000. On March 29, 1994, the U.S. District Court in Tyler, Texas granted the plaintiff's motion for partial summary judgement. The Court ruled the Plan is subject to the provision of the F-47 117 MEMORIAL HOSPITAL FOUNDATION -- PALESTINE, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Employee Retirement Security Act (ERISA). However, the Court did not address the issue of damages and the Foundation is appealing the Court's ruling regarding ERISA. The Foundation believes the suit is without merit and expects to defend and conclude the action in its favor. The Foundation is a defendant in a lawsuit filed by one of its patients for injuries sustained. On April 6, 1994, the jury returned a verdict against the Foundation and awarded the plaintiffs $5,031,014 in damages, plus interest at 10% per annum. The Foundation is appealing the decision. The Foundation is of the opinion that the Foundation's insurer is solely responsible for payment of the damages plus interest. The Foundation's insurer has posted a $5,545,000 bond. Due to the uncertainty of the outcome of the appeals process and the coverage provided by the Foundation's insurer, the amount of damages plus interest has not been reflected in the accompanying consolidated financial statements. On August 11, 1993, the Anderson County Appraisal Review Board voted to revoke the tax-exempt status previously granted to the Foundation, effective January 1, 1993. The amount of tax in controversy is $120,507. The Foundation filed suit, on August 31, 1993, against the Anderson County Appraisal District in order to overturn the decision of the District and regain its status as an entity that is exempt from paying property taxes. The Foundation believes it meets the legal requirements for property tax exemption and will prevail in the suit. The Foundation is a defendant in two lawsuits filed on behalf of former patients. Outside counsel for the Foundation has advised that at this stage in the proceedings they cannot offer an opinion as to the probable outcome. The Foundation believes the suit is without merit and is vigorously defending its position. Therefore, no contingent liability has been accrued. F-48 118 ====================================================== NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO BUY, OR SOLICITATION OF, ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. --------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 The Company........................... 9 The Recapitalization and the Merger... 9 Risk Factors.......................... 11 Use of Proceeds....................... 18 Dividend Policy....................... 18 Capitalization........................ 19 Dilution.............................. 20 Selected Consolidated Financial Data................................ 21 Pro Forma Condensed Consolidated Financial Statements................ 23 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 29 Business.............................. 40 Management............................ 55 Certain Relationships and Related Transactions........................ 60 Principal Stockholders................ 62 Description of Capital Stock.......... 62 Shares Eligible for Future Sale....... 64 Underwriting.......................... 66 Legal Matters......................... 67 Experts............................... 67 Additional Information................ 68 Index to Consolidated Financial Statements.......................... F-1
--------------------- UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ====================================================== ====================================================== 5,700,000 SHARES [LOGO] PROVINCE HEALTHCARE COMMON STOCK ------------------- PROSPECTUS ------------------- BT ALEX. BROWN BANCAMERICA ROBERTSON STEPHENS GOLDMAN, SACHS & CO. THE ROBINSON-HUMPHREY COMPANY , 1997 ====================================================== 119 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is a statement of estimated expenses of the issuance and distribution of the securities being registered other than underwriting compensation: Securities and Exchange Commission Registration Fee......... $ 29,796 NASD Filing Fee............................................. 10,333 Nasdaq Original Listing Fee................................. 50,000 Blue Sky Fees and Expenses (including attorneys' fees and expenses)................................................. 2,000 Printing and Engraving Expenses............................. 325,000 Transfer Agent's Fees and Expenses.......................... 11,500 Accounting Fees and Expenses................................ 410,000 Legal Fees and Expenses..................................... 335,000 Miscellaneous Expenses...................................... 26,371 ---------- Total..................................................... $1,200,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Prior to the consummation of the offering, the Company will complete the Reincorporation. Section 145 of the General Corporation Law of the State of Delaware ("Section 145") provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was illegal. A Delaware corporation may indemnify any persons who are, or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, provided such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the corporation's best interests except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him against the expenses which such officer or director has actually and reasonably incurred. The Company's Certificate of Incorporation will provide for the indemnification of directors and officers of the Company to the fullest extent permitted by Section 145. In that regard, the Certificate of Incorporation will provide that the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, administrative or investigative (other than action by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of the Company as a director, officer or member of II-1 120 another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of such corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Indemnification in connection with an action or suit by or in the right of such corporation to procure a judgment in its favor is limited to payment of expenses (including attorneys' fees) actually and reasonably incurred in connection with the defense or settlement of such an action or suit except that no such indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the indemnifying corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine that, despite the adjudication of liability but in consideration of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. The Company has in effect insurance policies covering all of the Company's directors and officers in certain instances where by law they may not be indemnified by the Company. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In connection with the Recapitalization and the Merger, on December 17, 1996, the Company sold (i) 20,000 shares of its Series A Senior Preferred Stock, no par value, to Leeway & Co.; (ii) an aggregate of 28,540 shares of its Series B Junior Preferred Stock, no par value (the "Junior Preferred"), to GTCR Fund IV, Leeway & Co., certain members of management and certain other investors; and (iii) an aggregate of 7,280,020 shares of its Common Stock, no par value, to GTCR Fund IV, Leeway & Co., Messrs. Rash and Gore and certain other investors. The aggregate purchase price for all such purchases was $31,612,700. On July 15, 1997, pursuant to the terms of a Stockholders Agreement, dated as of December 17, 1996 among the Company and its stockholders, the Company sold an aggregate of 3,755 shares of the Junior Preferred and 958,222 shares of the Common Stock to GTCR Fund IV, Leeway & Co., Messrs. Rash and Gore and certain other investors for an aggregate purchase price of $4,181,888. In addition, on September 12, 1997, Leeway & Co. exercised its warrant to purchase 343,274 shares of Common Stock for an aggregate exercise price of $15,447. All of the sales described above were deemed to be exempt from registration under the Securities Act by virtue of Section 4(2) thereof, as transactions not involving a public offering. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. **1.1 -- Underwriting Agreement 2.1 -- Agreement and Plan of Merger, dated as of December 16, 1996, between Brim, Inc. ("Brim") and Carryco, Inc. 2.2 -- Plan and Agreement of Merger, dated as of December 17, 1996, between Brim, Principal Hospital Company ("PHC") and Principal Merger Company 2.3 -- Agreement and Plan of Merger dated as of November 27, 1996 between Brim, Brim Senior Living, Inc., Encore Senior Living, L.L.C. and Lee Zinsli **3.1 -- Amended and Restated Certificate of Incorporation of the registrant **3.2 -- Amended and Restated By-laws of the registrant **4.1 -- Form of Common Stock Certificate
II-2 121 4.2 -- Securities Purchase Agreement, dated as of December 17, 1996, between Brim and Leeway & Co. **4.3 -- Form of Series A Senior Preferred Stock Certificate **4.4 -- Form of Series B Junior Preferred Stock Certificate *4.5 -- Credit Agreement, dated as of December 17, 1996, among Brim, First Union National Bank of North Carolina and the other lenders party thereto *4.6 -- First Amendment to Credit Agreement and Modification of Loan Documents, dated March 26, 1997, among PHC, First Union National Bank of North Carolina and the other lenders under the Credit Agreement 4.7 -- Second Amendment to Credit Agreement and Modification of Loan Documents dated August , 1997, among PHC, First Union National Bank of North Carolina and the other lenders under the Credit Agreement. **5.1 -- Opinion of Kirkland & Ellis with respect to validity of Common Stock 10.1 -- Investment Agreement, dated as of November 21, 1996, between Brim, Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR") and PHC 10.2 -- First Amendment to Investment Agreement, dated as of December 17, 1996, between Brim, GTCR and PHC *10.3 -- Form of Investment Agreement Counterpart 10.4 -- Preferred Stock Purchase Agreement, dated as of November 25, 1996, between Brim and General Electric Capital Corporation 10.5 -- Employment Agreement, dated as of December 17, 1996, by and between Steven P. Taylor and Brim 10.6 -- Employment Agreement, dated as of December 17, 1996, by and between A.E. Brim and Brim *10.7 -- Stockholders Agreement by and among Brim, GTCR, Leeway & Co., First Union Corporation of Virginia, AmSouth Bancorporation, Martin S. Rash ("Rash"), Richard D. Gore ("Gore"), PHC and certain other stockholders **10.8 -- First Amendment to Stockholders Agreement dated as of July 14, 1997 by and among the Company, GTCR Fund IV, Rash, Gore and certain other stockholders *10.9 -- Registration Agreement by and among Brim, PHC, GTCR, Leeway & Co., First Union Corporation of America, AmSouth Bancorporation and certain other stockholders *10.10 -- Senior Management Agreement, dated as of December 17, 1996, between Brim, Rash, GTCR, Leeway & Co. and PHC **10.11 -- First Amendment to Senior Management Agreement dated as of July 14, 1997 between the Company, Rash and GTCR Fund IV *10.12 -- Senior Management Agreement, dated as of December 17, 1996, between Brim, Gore, GTCR, Leeway & Co. and PHC **10.13 -- First Amendment to Senior Management Agreement dated as of July 14, 1997 between the Company, Gore and GTCR Fund IV *10.14 -- Professional Services Agreement, dated as of December 17, 1996, by and between GTCR, Brim and PHC 10.15 -- Lease and Security Agreement dated April 11, 1994, as amended, by and between Nationwide Health Properties, Inc. and Brim Hospitals, Inc. 10.16 -- Lease Agreement dated December 16, 1985, as amended, by and between Union Labor Hospital Association and Brim Hospitals, Inc. *10.17 -- Lease Agreement dated October 1, 1996 by and between County of Starke, State of Indiana, and Principal Knox Company II-3 122 10.18 -- Lease Agreement dated December 1, 1992 by and between Palo Verde Hospital Association and Brim Hospitals, Inc. 10.19 -- Lease Agreement dated May 15, 1986, as amended, by and between Fort Morgan Community Hospital Association and Brim Hospitals, Inc. 10.20 -- Lease Agreement dated April 24, 1996, as amended, by and between Parkview Regional Hospital, Inc. and Brim Hospitals, Inc. *10.21 -- Lease Agreement and Annex dated June 30, 1997 by and between The Board of Trustees of Needles Desert Communities Hospital and Prince-Needles, Inc. 10.22 -- Stock Purchase and Sale Agreement dated as of November 27, 1996 between Brim, CC-Lantana, Inc. and Lee Zinsli 10.23 -- Purchase and Sale Agreement dated as of November 25, 1996 between Brim, Brim Senior Living, Inc., Brim Pavilion, Inc., and Plaza Enterprises, L.L.C. *10.24 -- Amended and Restated Limited Partnership Agreement of Aligned Business Consortium Group, L.P. dated June 1, 1997 *10.25 -- Corporate Purchasing Agreement dated April 21, 1997 between Aligned Business Consortium Group and PHC **10.26 -- Principal Hospital Company 1997 Long-Term Equity Incentive Plan 10.27 -- Lease Agreement dated December 17, 1996 between Brim and Encore Senior Living, L.L.C. *11.1 -- Computation of Earnings per Share *16.1 -- Letter of KPMG Peat Marwick, LLP regarding change in certifying accountants. *21.1 -- Subsidiaries of the registrant **23.1 -- Consent of Kirkland & Ellis (included in opinion filed as Exhibit 5.1) 23.2 -- Consent of Ernst & Young LLP 23.3 -- Consent of KPMG Peat Marwick LLP 23.4 -- Consent of Harrell, Rader, Bonner & Bolton **23.5 -- Consent of Waller Lansden Dortch & Davis, A Professional Limited Liability Company *24.1 -- Power of Attorney (included on signature page) *27.1 -- Financial Data Schedule
- --------------- * Previously filed. ** To be filed by Amendment. (b) Financial Statement Schedules. Schedule II -- Valuation and Qualifying Accounts. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to every purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense II-4 123 of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 124 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brentwood, State of Tennessee on October 8, 1997. PROVINCE HEALTHCARE COMPANY By: /s/ RICHARD D. GORE ------------------------------------ Richard D. Gore Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the Registration Statement has been signed on October 8, 1997, by the following persons in the capacities indicated:
SIGNATURE CAPACITY --------- -------- * President and Chief Executive Officer, Director - --------------------------------------------------- Martin S. Rash /s/ RICHARD D. GORE Executive Vice President and Chief Financial - --------------------------------------------------- Officer Richard D. Gore * Vice President and Controller (Chief Accounting - --------------------------------------------------- Officer) Brenda B. Rector * Director - --------------------------------------------------- Bruce V. Rauner * Director - --------------------------------------------------- Joseph P. Nolan * Director - --------------------------------------------------- A. E. Brim * Director - --------------------------------------------------- Michael T. Willis * Director - --------------------------------------------------- David L. Steffy *By: /s/ RICHARD D. GORE ------------------------------ Richard D. Gore Attorney-in-Fact
II-6 125 REPORT OF INDEPENDENT AUDITORS Board of Directors Province Healthcare Company We have audited the consolidated financial statements of Province Healthcare Company (formerly known as Brim, Inc. until January 16, 1997 and as Principal Hospital Company from January 16, 1997 until October , 1997) and subsidiaries as of December 31, 1996, and for the year then ended, and have issued our report thereon dated April 30, 1997, except for Note 16, and Notes 1 and 17, as to which the dates are May 8, 1997 and October , 1997, respectively (included elsewhere in this Registration Statement). Our audit also included the financial statement schedule as of December 31, 1996 and for the year then ended, listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Nashville, Tennessee April 30, 1997, except for Note 16, and Notes 1 and 17, as to which the dates are May 8, 1997 and October , 1997, respectively The foregoing report is in the form that will be signed upon the completion of the reincorporation described in Note 17 to the consolidated financial statements. Ernst & Young LLP Nashville, Tennessee October 8, 1997 S-1 126 INDEPENDENT AUDITORS' REPORT The Board of Directors Province Healthcare Company Under the date of March 8, 1996, we reported on the consolidated balance sheet as of December 31, 1995 and the consolidated statements of operations, common stockholders equity (deficit), and cash flows of Province Healthcare Company (formerly Brim, Inc.) and subsidiaries, as of December 31, 1995, and for the years ended December 31, 1994 and 1995, which are included in the prospectus. In connection with our audit of the aforementioned financial statements, we also audited the related financial statement schedule for the years ended December 31, 1994 and 1995, listed in Item 16(b) of this Registration Statement. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Portland, Oregon March 8, 1996 S-2 127 PROVINCE HEALTHCARE COMPANY AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E - ---------------------- ---------- ------------------------------ ------------- ---------- ADDITIONS ------------------------------ (2) (1) CHARGED TO BALANCE AT CHARGED TO OTHER BALANCE AT BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD ----------- ---------- ---------- ---------------- ------------- ---------- Year ended December 31, 1994: Allowance for doubtful accounts......... $1,679 $5,056 -- $4,507(1) $2,228 Year ended December 31, 1995: Allowance for doubtful accounts......... 2,228 4,601 -- 4,751(1) 2,078 Year ended December 31, 1996: Allowance for doubtful accounts......... 2,078 9,578 98(2) 7,277(1) 4,477
- --------------- (1) Uncollectible accounts written off, net of recoveries. (2) Allowances as a result of facility acquisitions. S-3 EX-2.1 2 AGREEMENT AND PLAN OF MERGER DATED 12-16-96 1 Exhibit 2.1 AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger (this "Agreement") is dated as of December 16, 1996 by and between BRIM, INC., an Oregon corporation ("Brim"), and CARRYCO, INC. an Oregon corporation ("Carryco"). RECITALS 1. Carryco was formed by certain shareholders of Brim to facilitate a recapitalization of Brim in connection with consummating a series of transactions described in that certain Investment Agreement by and between Brim and Golder, Thoma, Cressy, Rauner Fund IV, L.P. (the "Investment Agreement"). 2. The Investment Agreement contemplates that Carryco will merge with and into Brim in accordance with the terms of this Agreement (the "Merger"). 3. Pursuant to the Merger, Carryco will he merged with and into Brim and the separate existence of Carryco will cease. 4. Pursuant to the Merger, each share of outstanding Common Stock of Brim ("Brim Common") except Common Stock owned by Carryco prior to the Merger (which will become treasury stock of Brim pursuant to the Merger and will be cancelled), will be converted into one share of Junior Redeemable Preferred Stock of Brim ("Junior Redeemable Preferred"); each option to purchase shares of Brim Common will be converted into an option to purchase the same number of shares of Junior Redeemable Preferred; and each share of outstanding Common Stock of Carryco ("Carryco Common") will be converted into shares of Brim Common and shares of Junior Preferred Stock of Brim ("Junior Preferred") as set forth in this Agreement. AGREEMENT NOW, THEREFORE, the parties hereby agree as follows: SECTION 1 THE MERGER. 1.1 THE MERGER. Subject to the terms and conditions of this Agreement, Carryco will merge with and into Brim. At the Effective Time, as defined in Section 1.2, the separate existence of Carryco shall cease and Brim shall continue as the surviving corporation of the Merger. 1.2 EFFECTIVE TIME. The Merger will become effective when a duly executed and certified copy of the Articles of Merger, substantially in the form of EXHIBIT A, is filed with the Secretary of State of the State of Oregon (the "Effective Time"). 2 1.3 EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the Oregon Business Corporation Act (the "Act"). Without limiting the generality of the foregoing, at the Effective Time Brim shall possess all the rights, privileges, immunities and franchises, of a public as well as a private nature, of Carryco, and all property, real, personal, intangible and mixed, and all debts, contingent or otherwise, and all other choses in action, and all other interests of Carryco shall be deemed vested in Brim without further act or deed. After the Effective Time, Brim shall be responsible and liable for all the liabilities and obligations of Carryco. 1.4 CANCELLATION AND CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger and without any action on the part of the holder of any stock or securities of Brim or Carryco: 1.4.1 Each share of Brim Common then issued and outstanding shall be cancelled and changed into one share of Junior Redeemable Preferred, except for Common Stock owned by Carryco prior to the Merger (which will become treasury stock of Brim pursuant to the Merger and will be cancelled). 1.4.2 All issued and outstanding options for the purchase of shares of Brim Common shall, when vested in accordance with the applicable option agreement, be exercisable for the identical number of shares of Junior Redeemable Preferred, subject to the terms and conditions of the applicable option agreement, pursuant to the Brim, Inc. 1992 Non-Statutory Stock Option Plan and the Brim, Inc. 1993 Stock Incentive Plan. 1.4.3 Each share of Carryco Common then issued and outstanding shall be cancelled and changed into 5.18795 shares of Brim Common and 0.05188 shares of Junior Preferred. 1.4.4 The shares of Preferred Stock of Brim issued and outstanding prior to the Effective Time shall remain issued and outstanding and the rights and obligations of the holder thereof shall not be affected by the Merger. 1.5 NO FURTHER RIGHTS. From and after the Effective Time, except as otherwise provided by law, (i) holders of stock certificates formerly evidencing the Brim Common shall cease to have any rights as holders Brim Common, except for the right to receive shares of Junior Redeemable Preferred; and (ii) holders of Carryco Common shall cease to have any rights as holders of stock of Carryco, except for the right to receive Brim Common and Junior Preferred as provided in Section 1.4.3. 2 3 1.6 ISSUANCE OF NEW CERTIFICATES. 1.6.1 Certificates representing shares of Brim Common immediately prior to the Effective Time shall be deemed for all purposes to represent shares of Junior Redeemable Preferred and, the Brim Board of Directors may elect not to issue new certificates representing shares of Junior Redeemable Preferred. 1.6.2 Brim shall, promptly after the Effective Date, issue to holders of shares of Carryco Common, certificates representing shares of Brim Common and Junior Preferred, in such amounts as is provided in Section 1.4.3 hereof. 1.7 DISSENTING SHARES. Holders of Brim Common or Carryco Common who dissent from the Merger ("Dissenting Shares") shall be entitled to dissenters' rights only to the extent provided for by the Act. 1.8 ARTICLES OF INCORPORATION; DIRECTORS. 1.8.1 Subject to Section 1.1, at the Effective Time, the Articles of Incorporation of Brim, as amended, shall be the Articles of Incorporation of the surviving corporation of the Merger. 1.8.2 The directors of Brim immediately prior to the Effective Time shall remain the directors of Brim until their successors are duly elected and qualified or until their earlier resignation. 1.9 CLOSING. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at such time and location as Brim and Carryco may mutually select (the "Closing Date"). Immediately after the Closing, the Certificate of Merger will be filed as provided in Section 1.2. The Merger and other actions contemplated in Section 1 are referred to as the "Transactions." 1.10 TAX CONSEQUENCES. It is intended that the Merger shall constitute a reorganization within the meaning of Section 368(a) (1) (A) of the Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement shall constitute or be a part of a "plan of reorganization" for the purposes of Section 368 of the Code. 1.11 TERMINATION. Notwithstanding the approval of this Agreement by the shareholders of Brim or Carryco, this Agreement may be unilaterally terminated, at any time prior to the Effective Time, by the Board of Directors of Brim or Carryco. 3 4 SECTION 2 MISCELLANEOUS PROVISIONS. 2.1 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Oregon, without regard to the principles of conflicts of laws. 2.2 PARTIAL INVALIDITY. If any one or more of the provisions contained herein shall be held, for any reason, to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision were not contained in this Agreement. 2.3 SUCCESSORS AND ASSIGNS, PARTIES IN INTEREST. This Agreement shall not be assignable by any party hereto without the prior written consent of the other parties. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns. 2.4 NO THIRD-PARTY BENEFICIARY RIGHTS. Nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon any person or entity other than the parties and their successors and permitted assigns, any right, remedy or claim under or by reason of this Agreement. 2.5 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be considered an original counterpart, and shall become a binding agreement when each party shall have executed one counterpart. 2.6 EXHIBIT. EXHIBIT A referred to in this Agreement shall be construed as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. 2.7 FURTHER ACTIONS. Each of the parties hereto agrees that, subject to its legal obligations, it will use its best efforts to fulfill all conditions precedent specified herein, to the extent that such conditions are within its control, and to do all things reasonably necessary to consummate the Transactions. 2.8 ENTIRE AGREEMENT. This Agreement, including the Exhibits, contains the entire understanding of the parties hereto with respect to the Transactions and supersedes all other prior agreements and understandings, oral and written, between the parties hereto with respect to the Transactions. 2.9 AMENDMENT. This Agreement may not be amended except in writing executed by the parties hereto; provided that after this Agreement has been adopted by the shareholders of Brim and Carryco, no such amendment shall reduce the amount or change the form of the Merger consideration to be paid pursuant to this 4 5 Agreement or alter or change any of the terms or conditions of this Agreement if such alteration or change would adversely affect the shareholders of Brim or Carryco. IN WITNESS WHEREOF, Brim and Carryco each have caused this Agreement to be executed as of the date first above written. BRIM, INC. Attest: /s/ K. David McAllister - --------------------------- By /s/ A. E. Brim Secretary or ----------------------------- Assistant Secretary Its President --------------------------- CARRYCO, INC. Attest: /s/ K. David McAllister - --------------------------- By [Signature illegible] Secretary or ---------------------------- Assistant Secretary Its President --------------------------- 5 EX-2.2 3 AGREEMENT AND PLAN OF MERGER DATED 12-17-96 1 Exhibit 2.2 PLAN AND AGREEMENT OF MERGER dated as of December 17, 1996 by and among BRIM, INC., PRINCIPAL MERGER COMPANY, and PRINCIPAL HOSPITAL COMPANY 2 PLAN AND AGREEMENT OF MERGER This Plan and Agreement of Merger ("Agreement"), dated as of December 17, 1996, is entered into by and among Brim, Inc., an Oregon corporation ("Brim"), Principal Merger Company, a Delaware corporation and a wholly-owned subsidiary of Brim ("Newsub"), Principal Hospital Company, a Delaware corporation ("PHC") and all of the shareholders of PHC, whose names appear on the signature page attached hereto (the "Shareholders"). RECITALS This Agreement describes a merger (the "Principal Merger") that is intended to follow the closing of a series of transactions by which Brim was reorganized and recapitalized (the "Recapitalization") and divested certain assets and operating entities (the "Divestitures"; the Recapitalization and the Divestitures being the "Precedent Transactions"). NOW, THEREFORE, in consideration of the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: ARTICLE I MERGER; GOVERNANCE; CONVERSION; OTHER CONSIDERATION 1.01 The Merger. (a) On the Effective Date (as defined in Section 2.01(c) hereof), Newsub shall be merged with and into PHC, and PHC shall be the surviving corporation. The corporate existence of PHC with all its purposes, powers and objects shall continue unaffected and unimpaired by the Merger; and as the surviving corporation, PHC shall be governed by the laws of the State of Delaware and succeed to all rights, assets, liabilities and obligations of Newsub as provided for in the Delaware General Corporation Law. The separate existence and corporate organization of Newsub shall cease upon the Effective Date, and PHC shall continue as the surviving corporation and a wholly-owned subsidiary of Brim. 3 (b) If at any time after the Effective Date the surviving corporation shall consider or be advised that any further assignments or assurances in law or any other things are necessary or desirable to vest, perfect, confirm, record or otherwise, in the surviving corporation, the title to any property or right of Newsub acquired or to be acquired by reason of or as a result of the Merger, the officers and directors of Newsub holding office prior to the Effective Date shall in the name of PHC or otherwise execute and deliver all such proper deeds, assignments and assurances in law and do all things necessary and proper to carry out the purpose of this Agreement. 1.02 Governance. (a) The Certificate of Incorporation of PHC, as in effect on the Effective Date, shall be the Certificate of Incorporation of the surviving corporation. (b) The Bylaws of PHC, as in effect on the Effective Date, shall be the Bylaws of the surviving corporation. (c) The directors and officers of PHC on the Effective Date shall be the directors and officers of the surviving corporation until their successors are elected or until their earlier resignation or removal. l.03 Conversion of Shares. At the Effective Date, the manner and basis of converting and exchanging the shares of each of PHC and Newsub shall be as follows: (a) Each share of Common Stock, no par value, of Newsub issued immediately prior to the Effective Date (the "Newsub Shares") shall, subject to the provisions of the Delaware General Corporation Law, by virtue of the Merger and without any action on the part of Brim, be converted into one share of PHC Class B Common Stock (such shares, as converted, being the PHC Merger Shares). (b) Each share of Class A Common stock and each share of Class B Common Stock held by each Shareholder and outstanding immediately prior to the Effective Date (collectively, the "PHC Shares") shall, subject to the provisions of the Delaware General Corporation Law, by virtue of the Merger and without 2 4 any action on the part of the holder thereof be converted into shares of the Junior Preferred Stock and Common Stock of Brim (collectively, the "Conversion Shares"), to each holder in such number as is set forth on ANNEX A hereto, so that each Shareholder shall receive that number of Conversion Shares set forth therein. (c) Each Shareholder shall by virtue of the Merger cease to have any rights with respect to the PHC Shares other than pursuant to the provisions of this Article. (d) On and after the Effective Date, each Shareholder may surrender his PHC Share certificate or certificates therefor to the surviving corporation. Upon proper surrender of a certificate or certificates representing such PHC Shares to the surviving corporation each Shareholder thereof shall be entitled to receive a certificate or certificates for the number of Conversion Shares provided for herein. (e) On and after the Effective Date, Brim may surrender the certificate evidencing the Newsub Shares in exchange for a certificate evidencing the PHC Merger Shares. ARTICLE II CLOSING 2.01 The Closing. The closing (the "Closing") of the transactions contemplated in this Agreement shall take place at the offices of Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois, on or before December 17, 1996 (the "Closing Date"), or at such other place, date and time as may be agreed upon by Brim, Newsub, PHC and the Shareholders. For the purposes of this Agreement, the Effective Date and the day of Closing are assumed to be the same day; if however, the Effective Date is delayed beyond the Closing Date for any reason, any action to be taken only upon the Effective Date shall be deemed to have taken place on such day. (a) Deliveries of PHC and the Shareholders. At or prior to the Closing, PHC and the Shareholders shall deliver or cause to be delivered to Brim the following: 3 5 (i) certificates evidencing the PHC Shares; and (ii) all other previously undelivered documents required to be delivered by each Shareholder to Brim at or prior to the Closing Date in connection with the transactions contemplated hereby. (b) Deliveries by Brim. At or prior to the Closing, Brim shall deliver or cause to be delivered to PHC and the Shareholders the following: (i) Certificates evidencing the Conversion Shares, which certificates shall be properly and duly registered in the name of each Shareholder in the denomination provided for herein, to be delivered against receipt by Brim of the respective certificates for the PHC Shares; and (ii) All other previously undelivered documents required to be delivered by Brim to the Shareholders at or prior to the Closing Date in connection with the transactions contemplated hereby. (c) Merger. At the Closing (or at such earlier time as the parties may agree) Newsub and PHC shall execute and acknowledge the Certificate of Merger, in the form(s) attached hereto as Exhibit 2.01(c), together with such other certificates or documents as may be required to be filed under the laws of the State of Delaware to effect the Merger (collectively, the "Merger Documents"). PHC shall, on the Closing Date, through its counsel, cause said Merger Documents to be filed with the Secretary of State of Delaware, and to be filed or recorded with such other government officials as may be required to make the Merger effective on the Closing Date. The date on which the Merger shall become effective in accordance with Delaware law is heretofore and hereinafter referred to as the "Effective Date". 4 6 ARTICLE III PHC'S REPRESENTATIONS AND WARRANTIES PHC has heretofore delivered to Brim copies of the transaction documents and disclosure schedules (collectively, the "Transaction Documents") pertaining to or arising in connection with: (i) the formation and initial capitalization of PHC; (ii) PHC's acquisition of an interest in Memorial Hospital, Palestine, Texas, through Palestine-Principal, Inc. ("PPI"), a Tennessee corporation and wholly-owned subsidiary of PHC, and Palestine Principal Healthcare Limited Partnership ("PPHLP"), a Texas limited partnership; (iii) the long-term lease of Starke Memorial Hospital, Knox, Indiana, through Principal Knox Company ("PKC"), a Delaware corporation and wholly-owned subsidiary of PHC; (iv) PHC's $25,000,000 credit facility with AmSouth Bank of Alabama and First Union National Bank of North Carolina and (v) the Brim credit facility with First Union National Bank of North Carolina as agent, all of which Transaction Documents constitute and may be referred to collectively as the "PHC Disclosure Documents". Except as set forth in the PHC Disclosure Documents, PHC does hereby represent and warrant to Brim as follows with respect to PHC and the Subsidiaries and the business, assets, liabilities and operations thereof: 3.01. Organization and Qualification. (a) PHC is a corporation duly organized and validly existing under the laws of the State of Delaware. Each of the Subsidiaries (as defined in Paragraph 3.01(c) below) is a corporation, partnership or limited liability company, duly organized and validly existing under the laws of the jurisdiction reflected in the PHC Disclosure Documents. PHC and each Subsidiary has full corporate or partnership power and authority to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties. (b) PHC and each of the Subsidiaries is duly qualified, licensed or admitted to do business and is in good standing in each jurisdiction in which the ownership, use or leasing of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary. The PHC Disclosure Documents sets forth the foreign jurisdictions in which PHC and each of the Subsidiaries is qualified to do business. 5 7 (c) Except for PPI, PPHLP, and PKC (individually, a "Subsidiary" and collectively, the "Subsidiaries"), PHC does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity. 3.02. Capital Stock. (a) As of the date hereof, the authorized capital stock of PHC consists solely of 26,000 shares of Class A Common Stock, $.01 par value per share, and 150,000 shares of Class B Common Stock, $.01 par value per share (the issued and outstanding shares of the Class A Common Stock and the Class B Common Stock may be referred to collectively herein as the "Common Stock"). The number of issued and outstanding shares of the Common Stock and the holders thereof are listed in Annex A hereto. Except as set forth in the PHC Disclosure Documents and except as specifically contemplated by Article I of this Agreement, there are no outstanding subscriptions, options, warrants, rights (including "phantom" stock rights), preemptive rights or other contracts, commitments, understandings or arrangements, including any right of conversion or exchange under any outstanding security, instrument or agreement (together, the "Rights"), obligating PHC or any Subsidiary to issue or sell any shares of its capital stock or to grant, extend or enter into any Right with respect thereto nor any voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person other than PHC or the Shareholders with respect to the voting of or the right to participate in dividends or other earnings on any capital stock or other equity security of PHC or any of the Subsidiaries. (b) The outstanding shares of Common Stock are duly authorized, validly issued, fully paid and nonassessable. (c) Except as set forth in the PHC Disclosure Documents, there are no outstanding contractual obligations to which PHC is a party to repurchase, redeem or otherwise acquire any of the PHC Shares. 6 8 (d) Except as set forth in the PHC Disclosure Documents, there are no outstanding obligations by PHC to provide funds in excess of $100,000 to, or to make any investment (in the form of a loan, capital contribution or otherwise) in excess of $100,000 in, any other person, excluding any of the Subsidiaries. Commitments with respect to equipment purchases or leases are described in Section 3.10(b) hereof. 3.03. Authority Relative to this Agreement. PHC has full corporate power and authority to enter into this Agreement and each other instrument, document and agreement necessary to consummate the transactions contemplated hereby, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by PHC and the consummation by PHC of the transactions contemplated hereby have been duly and validly approved by the Board of Directors and the Shareholders of PHC, and no other corporate proceedings on the part of PHC are necessary to authorize the execution, delivery and performance of this Agreement by PHC and the consummation by PHC of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by PHC and, subject to securing the Regulatory Approvals and the Third Party Consents (as each such term is defined in Article VII), constitutes a legal, valid and binding obligation of PHC enforceable against PHC in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.04. Approvals and Consents. Subject to obtaining such consents or making such filings as may be described in the PHC Disclosure Documents and as may be described in Paragraphs 7.02 and 7.03 of this Agreement, the execution and delivery of this Agreement by PHC does not, and the performance by PHC of its obligations hereunder and the consummation of the transactions contemplated hereby will not: (a) conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or 7 9 acceleration of, or result in the creation or imposition of any liens, claims, mortgages, encumbrances, pledges, security interests, equities and charges of any kind (each a "Lien") upon any of the assets or properties of PHC or any of the Subsidiaries under any of the terms, conditions or provisions of: (i) the articles of incorporation or bylaws (or other comparable charter or organizational documents) of PHC or any Subsidiary, (ii) any PHC Management Contract (as such term is defined in Paragraph 3.l0(c)), (iii) any PHC Lease (as such term is defined in Paragraph 3.10(c)), or (iv) (A) any statute, law, rule, regulation or ordinance (together, "Laws") of any state or of the United States, or any judgment, decree, order, writ, permit or license (together, "Orders"), of any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States or any domestic or foreign state (a "Governmental or Regulatory Authority"), applicable to PHC or any of the Subsidiaries or any of its or their respective assets or properties, or (B) to the knowledge of PHC, any Laws or Orders of any jurisdiction or governmental authority not specified in clause (A) or (C) any PHC Contract, as defined in Paragraph 3.10(b). (b) require any consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party under any of the terms, conditions or provisions of any Law or Order of any Governmental or Regulatory Authority to which PHC or any of the Subsidiaries is a party or by which PHC or any of the Subsidiaries or any of its or their respective assets or properties is bound; or (c) require any consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party under any of the terms, conditions or provisions of any PHC Management Contract, PHC Contract or PHC Lease to which PHC or any of the Subsidiaries is a party or by 8 10 which PHC or any of the Subsidiaries or any of its or their assets or properties is bound. 3.05. Financial Statements. PHC has delivered to Brim prior to the execution of this Agreement a true and complete copy of the unaudited consolidated balance sheet of PHC and its consolidated Subsidiaries as of the nine months ended September 30, 1996 (the "PHC Company Financial Statements") and the related statements of operations, stockholders' equity, and cash flows for the fiscal period ended as of each such date. The PHC Financial Statements were prepared in accordance with GAAP (except as may be indicated therein or in the notes thereto) and fairly present the consolidated financial position of PHC and its consolidated Subsidiaries as at the respective dates thereof and the consolidated results of their operations and cash flows for the respective periods then ended. 3.06. Absence of Certain Changes or Events. Except as set forth in the PHC Disclosure Documents or as contemplated by this Agreement, (a) since September 30, 1996 there has not been any change, event or development out of the ordinary course of business having, or that would be reasonably expected to have a "PHC Material Adverse Effect," as that term is defined in Section 3.10(e)(v) hereof, and (b) (i) between September 30, 1996 and the date hereof each of PHC and the Subsidiaries has conducted its businesses only in the ordinary course and with due regard to the proper maintenance and repair of any real property or personal property owned or leased by it or them and (ii) between September, 1996 and the date hereof, neither PHC nor any of the Subsidiaries has engaged in any of the transactions described in Paragraph 5.01(a). Nothing herein shall be construed as requiring PHC to disclose to Brim general changes in the health care industry which may, could or would have an affect on PHC either prior to or after the Closing. 3.07. Legal Proceedings. Except as disclosed in the PHC Disclosure Documents, there are no actions, suits, arbitrations or proceedings pending or, to the knowledge of PHC, threatened against, relating to or affecting, nor are there any Governmental or Regulatory Authority investigations or audits pending or to the knowledge of PHC threatened against, relating to or affecting, PHC or any of the Subsidiaries or any of its or their assets and 9 11 properties. For purposes hereof disputes with third party payors over the reimbursement due or paid to PHC Facilities shall not be deemed to be a legal proceeding, but should be the subject of the disclosure, if any, set forth under Paragraph 3.16. 3.08. Information Supplied. Any documents to be filed by PHC with any Governmental or Regulatory Authority in connection with this Agreement and the other transactions contemplated hereby will not, on the date they are filed or required to be filed, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by PHC with respect to information supplied in writing by or on behalf of Brim expressly for inclusion therein. 3.09. Compliance with Laws and Orders. (a) PHC and each of the Subsidiaries holds all permits, licenses, variances, exemptions, orders and approvals of all Governmental and Regulatory Authorities necessary for the leasing, ownership or operation of the hospitals and other related health care facilities owned by PHC (the "PHC Facilities") and the Subsidiaries and for the lawful conduct of the business of PHC and the Subsidiaries (the "PHC Permits") at PHC Facilities (as defined below), except to the extent the failure to have any such PHC Permit would not have a PHC Material Adverse Effect. (b) Each of PHC and the Subsidiaries is in substantial compliance with the terms of PHC Permits held by it. Except as disclosed in the PHC Disclosure Documents, to the knowledge of PHC, PHC and each of the Subsidiaries is in substantial compliance with any Law and in full compliance with any Order of any Governmental or Regulatory Authority applicable to it. For purposes hereof, PHC and the Subsidiaries shall be deemed to be in substantial compliance with PHC Permits and with any Law if its failure to comply therewith is the subject of a plan of correction which has been accepted by the applicable Governmental or Regulatory Authority. 3.10. Compliance with Agreements: Certain Agreements. 10 12 (a) Except as disclosed in the PHC Disclosure Documents or as would not have a PHC Material Adverse Effect, neither PHC nor any of the Subsidiaries is in breach or violation of, or in default in the performance or observance of any term or provision of, and no event has occurred which, with notice or lapse of time or both, would be reasonably expected to result in a default under: (i) its articles of incorporation or bylaws (or other comparable charter documents); (ii) any PHC Management Contract; (iii) any PHC Lease; (iv) any PHC Partnership Agreement; or (v) any PHC Contract (as defined below). (b) Except with respect to those agreements listed in the PHC Disclosure Documents, true and correct copies of which have been made available to Brim prior to the execution of this Agreement, the receipt of which is hereby acknowledged by Brim, or as provided for in this Agreement, to its knowledge, neither PHC nor any of the Subsidiaries is a party to, nor are any of its or their assets bound or affected by, any oral or written agreements of the following nature (the "PHC Contracts"): (i) consulting agreement, contract, arrangement or understanding not terminable whether with or without penalty on 90 days' or less notice involving the payment of more than $50,000 per annum individually or $100,000 per annum in the aggregate for all such agreements; (ii) union or collective bargaining agreement; (iii) agreement, contract, arrangement, commitment, understanding or obligation with any Key Employee (as hereinafter defined) of PHC or any of the Subsidiaries the benefits of which are contingent or vest, or the terms of which are materially altered, upon the occurrence of a transaction involving PHC of the nature contemplated by this Agreement; 11 13 (iv) agreement, contract, arrangement, commitment, understanding or obligation with respect to any Key Employee of PHC or any Subsidiary providing any term of employment or compensation guarantee extending for a period longer than 90 days after the date hereof and for the payment of more than $50,000 per annum individually or $100,000 per annum in the aggregate for all such agreements; (v) agreement or plan, including any stock option, stock appreciation right, restricted stock or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (vi) agreement, contract, arrangement, commitment, understanding or obligation to which it is a party limiting in any material respect its freedom or the freedom of any Key Employee to compete in any line of business with any person; (vii) agreement, contract, arrangement, commitment, understanding or obligation (i) evidencing any liability (A) in excess of $100,000, or (B) any liability for the obligations of any person in excess of $100,000 or (C) regardless of the amount thereof, that is not to be fully performed or that cannot be terminated whether with or without penalty within ninety (90) days after the Closing Date or (ii) defining the terms on which any other debt in excess of $100,000 has been or may be issued or incurred; provided, however, that for purposes of this Paragraph 3.10(a)(vii), an accrual or third party contractual allowance reflected on PHC Financial Statements shall not be deemed to be a liability subject to disclosure under the terms hereof; or (viii) agreement, contract, arrangement, commitment, understanding or obligation relating to it, its present or prospective business, operations, properties or assets in which any Key Employee has any interest, direct or indirect, including a description of any transactions between it and any Key Employee or any entity in which any Key Employee has any 12 14 interest (other than transactions between any corporation and a publicly held corporation in which the Key Employee holds less than five percent (5%) of the issued and outstanding shares of capital stock). (c) For purposes of this Agreement, the following defined terms used in this Paragraph and elsewhere in this Agreement shall have the meanings set forth below: (i) "PHC Management Contract" means any agreement to which PHC or any Subsidiary is a party providing for management, administrative or other services to be rendered in connection with the operation, administration, or supervision of any managed PHC Facility, which contracts include as of the date of this Agreement, those PHC Management Contracts identified in the PHC Disclosure Documents, true and correct copies of which have been made available to Brim prior to the execution of this Agreement, the receipt of which is hereby acknowledged by Brim. (ii) "PHC Lease" means those leases to which PHC or any Subsidiary is a party with respect to those hospitals and other related health care facilities identified in the PHC Disclosure Documents, true and correct copies of which have been made available to Brim prior to the execution of this Agreement, the receipt of which is hereby acknowledged by Brim. (iii)"PHC Partnership Agreement" means those partnership agreements in which PHC or any Subsidiary holds a general and/or limited partnership interest identified in the PHC Disclosure Documents, true and correct copies of which have been made available to Brim prior to the execution of this Agreement, the receipt of which is hereby acknowledged by Brim. (iv) "Key Employee" means all officers, managers and other employees and consultants of PHC or any Subsidiary whose current annual salary or rate of compensation (including bonus and incentive compensation) is $100,000 or more, as identified in the PHC Disclosure Documents. 13 15 (v) "PHC Material Adverse Effect" means an event or series of events affecting PHC (but specifically excluding events that are disclosed pursuant to the terms hereof in the Company's Disclosure Letter or in the exhibits hereto as of the date of execution of this Agreement that will have an adverse effect on the Company's earnings before interest, taxes, depreciation and amortization on an annualized basis of, calculated as of the Closing Date, in excess of $500,000. 3.11. Taxes. PHC has filed all tax returns which are required to have been filed in any jurisdiction with respect to PHC and each of the Subsidiaries, and has paid, before they have become delinquent, all taxes shown to be due and payable on such returns and, to the knowledge of PHC, all other taxes and assessments payable by PHC on behalf of itself or any of the Subsidiaries, to the extent the same have become due and payable, except for any taxes and assessments the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which PHC has set aside on its books reserves to the extent required by, and segregated in accordance with, GAAP. Except as set forth in the PHC Disclosure Documents, (i) PHC has no knowledge of any proposed material tax assessment against PHC or any of the Subsidiaries, (ii) to the knowledge of PHC all tax liabilities of PHC and the Subsidiaries are adequately provided for on the books of PHC and (iii) to the knowledge of PHC all of the tax returns previously filed by PHC and which, as of the date hereof, have not been audited by the applicable Governmental or Regulatory Authority having jurisdiction thereof, were true and correct in all material respects at the time filed by PHC. PHC has not received any notice of any past due or unpaid tax or assessment. 3.12. Employee Benefit Plans: ERISA. The PHC Disclosure Documents sets forth all of the bonus, deferred and incentive compensation, profit sharing, retirement, vacation, sick leave, leave of absence, hospitalization, severance, and fringe benefit plans, all "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all "employee welfare benefit plans" (as defined in Section 3(1) of ERISA) which PHC maintains, to which PHC contributes or has an obligation to contribute, or with respect to which PHC has any liability or reasonable expectation of liability, 14 16 whether or not any such plan has terminated and whether or not any such plan is or was maintained or contributed to by any current or former member of PHC's Controlled Group (within the meaning of Section 414 of the IRC) (the "Plans"). None of the Plans (i) is subject to Title IV of ERISA or the minimum funding requirements of Section 412 of the IRC or Section 302 of ERISA, (ii) is a plan of the type described in Section 4063 of ERISA or Section 413(c) of the IRC, (iii) is a "multiemployer plan" (as defined in Section 3(37) of ERISA) or (iv) provides for medical or life insurance benefits to current or future retired or former employees of PHC (other than as required under IRC Section 4980B or applicable state law). 1. Each Plan is, in all material respects, in compliance, and has been administered, maintained and funded in all material respects in accordance, with the applicable provisions of ERISA and the IRC and all other applicable laws, rules and regulations, including, but not limited to, medical continuation under IRC Section 4980B. None of PHC, any Controlled Group member, any fiduciary or any other person has, with respect to any Plan, (i) engaged in any transaction prohibited by ERISA, the IRC or other applicable law; (ii) breached any fiduciary duty owed by it; or (iii) failed to file and distribute timely and properly all reports and information required to be filed or distributed in accordance with ERISA or the IRC. 2. All contributions, premiums or payments which are due on or before the Closing Date with respect to the Plans have been timely, or will have been prior to the Closing Date, paid. 3. Each Plan which is intended to be qualified under section 401(a) of the IRC (i) has been timely amended to reflect all requirements of the Tax Reform Act of 1986 ("TRA 86") and all subsequent legislation which is required to be adopted prior to the end of the TRA 86 remedial amendment period and (ii) has received from the Internal Revenue Service a favorable determination letter which considers the terms of the Plan as amended for such tax law changes. Nothing has occurred since the date of such letter that could adversely affect the qualified status of such Plan or the tax-exempt status of any related trust. 15 17 4. No under funded defined benefit plan has been, during the five years preceding the Closing Date, transferred out of PHC's Controlled Group. 5. Except as set forth in the PHC Disclosure Documents. PHC has not incurred, and has no reason to expect that it will incur, any material liability to the Internal Revenue Service, the Department of Labor, the PBGC, any multiemployer plan or otherwise under Title IV of ERISA (including any withdrawal liability) or under the IRC with respect to any Plan or any other plan that PHC or any member of its Controlled Group maintains or ever has maintained or to which any of them contributes, ever has contributed, or ever has been required to contribute. 6. With respect to each Plan, PHC has provided Brim with true, complete and correct copies, to the extent applicable, of (i) all documents pursuant to which the Plans are maintained, funded and administered, (ii) the three most recent annual reports (Form 5500 series) filed with the Internal Revenue Service (with attachments), (iii) the three most recent financial statements, and (iv) all governmental rulings, determinations, and opinions (and pending requests for governmental rulings, determinations, and opinions). 3.13. Labor Matters. Except as set forth in the PHC Disclosure Documents or as would not have a PHC Material Adverse Effect, no unfair labor practice complaint for sex, age, race or other discrimination claim has been brought against PHC or any of the Subsidiaries in connection with its or their business before the National Labor Relations Board, the Equal Employment Opportunity Commission or any other Governmental Body during the three-year period ending as of the Closing Date nor has PHC or any of the Subsidiaries received written notice of the intention of any person to file any such claim which remains unresolved as of the date hereof. 3.14. Environmental Matters. (a) Except as disclosed in the PHC Disclosure Documents or as would not have a PHC Material Adverse Effect: (i) PHC complies with all applicable Environmental Laws and possesses and complies with 16 18 all applicable Environmental Permits required under such laws to operate as it presently operates; (ii) no events are likely to occur that would prevent compliance with, or materially increase the burden on PHC of complying with, applicable Environmental Laws or Environmental Permits required under such laws; (iii) there are no Materials of Environmental Concern in conditions and concentrations at any property owned or leased by PHC, that are reasonably expected to give rise to liability of PHC under any Environmental Law; and (iv) PHC has not received any written notification alleging that is liable for, or request for information pursuant to Section 104(e) of the Comprehensive Environmental Response, Compensation and Liability Act concerning, disposal of Materials of Environmental Concern at any location. (b) For purposes of this Agreement, the following defined terms used in this Paragraph and elsewhere in this Agreement shall have the meanings set forth below: (i) "Environmental Laws" shall mean all Federal, state. or local statutes, regulations, ordinances, codes, or decrees protecting the quality of the ambient air, soil, surface water or groundwater, in effect as of or, to the extent applicable, at any time prior to, the date of this Agreement. (ii) "Environmental Permits" shall mean all permits, licenses, registrations, and other authorizations required under applicable Environmental Laws. (iii) "Environmental Report" shall mean any report, study, assessment, audit, or other similar document that addresses any issue of noncompliance with, or liability under, any Environmental Law that may affect PHC. (iv) "Materials of Environmental Concern" shall mean any hazardous, acutely hazardous, or toxic substance or waste defined and regulated as such under the Environmental Laws, including without limitation the federal Comprehensive Environmental Response, Compensation and Liability Act and the federal Resource Conservation and Recovery Act. 3.15. Brokers or Finders. PHC represents that no agent, broker, investment banker, financial advisor or other firm or 17 19 person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement. 3.16. Cost Reports. PHC and each Subsidiary has duly and timely filed all cost reports which are required as of the date hereof to be filed by it in connection with the operation of PHC Facilities. A true and correct copy of all such cost reports which have been filed by PHC and each Subsidiary have been provided to Brim as of the date hereof is provided in the PHC Disclosure Documents, the receipt of which cost reports is hereby acknowledged by Brim. To the knowledge of PHC, all of such cost reports are true, correct and complete in all material respects and, except as set forth in the PHC Disclosure Documents or as would not have a PHC Material Adverse Effect, have been prepared in all material respects in accordance with the requirements of the Medicare and/or Medicaid Act, as applicable. Nothing herein shall be construed as a representation or warranty by PHC with respect to the filing of the cost reports with respect to any PHC Managed Facility. 3.17. Tangible Property and Assets. (a) PHC and the Subsidiaries have good and marketable title to, or have valid fee simple title or leasehold interests in, as applicable, or valid rights under contract to use, all tangible property and assets owned and/or used in and, individually or in the aggregate, material to the conduct of its or their businesses including all tangible property and assets reflected on the latest audited balance sheet included in the PHC Financial Statements, other than property or assets disposed of since such date or held subject to a lease or other contract permitted to expire in accordance with its terms since such date, in either case in the ordinary course of business (the "Tangible Property and Assets"). (b) PHC's title to the Tangible Property and Assets described in clause (a) is free and clear of all Liens other than (i) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent and (ii) any imperfection of title or similar Lien which individually or in the aggregate with other such Liens does not materially impair the value of the property or asset subject to such Lien or the use of such property or asset in the conduct of 18 20 the business of PHC and the Subsidiaries taken as a whole and (iii) any Lien which shall be satisfied and released of record as of the Closing Date. All such property and assets are, in all material respects, in good working order and condition, ordinary wear and tear excepted, and, to the knowledge of PHC, adequate and suitable for the purposes for which they are presently being used. (c) On the date hereof and on the Closing Date, the inventory and consumable supplies located at and used in connection with the operation of the Leased PHC Facilities are and shall be in a good and useable condition and sufficient in quantity and quality to operate such Leased PHC Facilities in a manner consistent with the past practices of PHC. (d) Neither PHC nor any of the Subsidiaries has received notice of any pending or threatened condemnation or taking by power of eminent domain or otherwise of any of the Tangible Assets or Property or, with respect to PHC's corporate office, any notice of any tax or special lien or assessment which would not be paid in full by the Closing Date. (e) Except as set forth in the PHC Disclosure Documents, neither PHC nor any of the Subsidiaries has notice that any of the Tangible Assets or Property is not in compliance with applicable building or zoning codes and ordinances. 3.18. Certification and Accreditation. Except as otherwise set forth in the PHC Disclosure Documents, the Leased PHC Facilities are certified to participate in Medicare and/or Medicaid and are duly accredited, subject to no contingencies other than those set forth in the correspondence described in Section 3.18 of PHC Disclosure Documents, true and correct copies of which have been made available to Brim and the receipt of which is acknowledged by Brim, by the Joint Commission on Accreditation of Healthcare Organizations. Nothing herein shall be construed as representation or warranty by PHC with respect to the certification or accreditation of the Managed PHC Facilities, which certification and accreditation is in the name of the owner of such Managed PHC Facilities and not in the name of PHC. As of the date hereof, PHC has not received any written or verbal notice of any action, investigation or other proceeding which has not been resolved as of the date hereof to revoke, terminate or not renew any such 19 21 certification or accreditation with respect to the Leased Company Facilities. 3.19. Insurance. The PHC Disclosure Documents set forth the insurance policies covering PHC's operations with respect to the Leased PHC Facilities and the Managed PHC Facilities in effect as of the date hereof, including the policy numbers, terms, identity of the insurers and amounts and nature of coverage. All of such policies are now and will be until Closing in full force and effect, with no premium arrearages. True and correct copies of all such policies and any endorsements thereto with respect to the Leased PHC Facilities and copies of any endorsements with respect to the Managed PHC Facilities have been made available to Brim prior to the date hereof, the receipt of which is hereby acknowledged by Brim. 3.20. Payments. Neither PHC nor any of the Subsidiaries has, directly or indirectly, paid or delivered or agreed to pay or deliver any fee, commission, or other sum of money or item or property, however, characterized, to any person, government official or other party related to the businesses of the Leased PHC Facilities or the Managed PHC Facilities which was, at the time paid or delivered, illegal under any applicable federal, state or local law. 3.21. Intellectual Property. (a) Neither PHC nor any of the Subsidiaries has received protection under federal or state law of any trademarks, trade names, logos, service marks, patents, patent rights, assumed names, trade secrets or copyrights used by them in their business. (b) Nothing herein shall be construed as a representation or warranty by PHC that the use by PHC and the Subsidiaries is in full compliance with all applicable hardware and software licensure laws and/or that the trademarks, trade names, logos, service marks, patents, patent rights, assumed names, trade secrets or copyrights used by PHC do not infringe on or violate the rights of any third parties. 3.22 Disclosure. No representation or warranty by PHC in this Agreement and no statement contained in any document, 20 22 certificate or other writing furnished by PHC to Brim or Newsub in connection with the transactions contemplated hereby, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BRIM AND NEWSUB Brim has heretofore delivered to PHC and the Shareholders or made available to them, copies of the transaction documents and disclosure schedules (collectively, the "Brim Transaction Documents") pertaining to or arising in connection with the Precedent Transactions. The representations and warranties of Brim and its subsidiaries set forth therein, that relate to the business, operations or financial condition of Brim as of the closing of the Precedent Transactions, are incorporated herein by reference, as the representations and warranties of Brim to PHC and the Shareholders. In addition, Brim and Newsub hereby jointly and severally represent and warrant to PHC and each of the Shareholders as follows: 4.01 Authorization, Etc. Brim and Newsub have full corporate power and authority to execute and deliver this Agreement and the documents and instruments contemplated hereby, and to carry out the transactions contemplated hereby and thereby. The Boards of Directors of Brim and Newsub have duly approved and authorized the execution and delivery of this Agreement and the documents and instruments contemplated hereby, and the consummation of the transactions contemplated hereby and thereby. No other corporate proceedings on the part of Brim and/or Newsub are necessary to approve and authorize the execution and delivery of this Agreement and the documents and instruments contemplated hereby by Brim and Newsub and the consummation by Brim and Newsub of the transactions contemplated hereby and thereby. This Agreement constitutes a valid and binding obligation of Brim and Newsub, enforceable against Brim and Newsub in accordance with its terms, except that (i) the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or 21 23 hereafter in effect relating to creditors' rights generally and (ii) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. 4.02 No Approvals or Conflicts. Neither the execution and delivery by Brim and/or Newsub of this Agreement nor the consummation by Brim and/or Newsub of the transactions contemplated hereby will (i) violate, conflict with or result in a breach of any provision of the certificate of incorporation or by-laws of Brim or any of its subsidiaries, including Newsub, (ii) violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or in a right of termination or cancellation of, or accelerate the performance required by, or result in the creation of any lien, security interest, charge or encumbrance upon any of Brim's or its subsidiaries' properties, or result in any of the terms, conditions or provisions of, any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, lease, contract, agreement or other instrument or commitment or obligation which binds or affects Brim or its subsidiaries, including Newsub, or any of their properties being declared void, voidable or without further binding effect, (iii) violate any order, writ, injunction, decree, judgment, ruling, law, rule or regulation of any court or governmental authority, domestic or foreign, applicable to Brim or its subsidiaries, including Newsub, or any of their properties, or (iv) require any consent, approval or authorization of, or notice to, or declaration, filing or registration with, any governmental or regulatory authority in connection with the execution, delivery and performance of this Agreement by Brim and/or Newsub, which, in the case of clauses (ii), (iii) and (iv) above, would have a Brim Material Adverse Effect. 4.03 No Brokers' or Other Fees. No broker, finder or investment banker is entitled to any brokerage, finder or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of Brim and/or Newsub. 22 24 4.04 Concerning Newsub. Brim and Newsub jointly and severally represent and warrant to PHC and the Shareholders as follows: (a) Newsub is a corporation duly organized and existing and in good standing under the laws of the State of Delaware. Accurate and complete copies of the Certificate of Incorporation and Bylaws of Newsub will be delivered to Shareholders prior to the Closing. (b) The authorized capital stock of Newsub is 100 shares of Common Stock, no par value. Newsub does not have any outstanding subscriptions, warrants, options or other agreements or commitments obligating Newsub to issue shares of its capital stock. (c) The Board of Directors of Newsub, and Brim as its sole shareholder, have approved this Agreement and the consummation of the transactions contemplated hereby and has authorized the execution and delivery of this Agreement by Newsub. Newsub has full power, authority and legal right to enter into this Agreement and to consummate the transactions contemplated hereby. This Agreement constitutes a valid and legally binding obligation of Newsub enforceable in accordance with its terms, except (i) that the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (d) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will result in the breach of any term or provision of the Certificate of Incorporation or Bylaws of Newsub or of any agreement or instrument of any kind to which it is a party or by which it is bound. 4.05 Conversion Shares. The Conversion Shares to be issued to the Shareholders pursuant to Section 1.03 hereof, at the time such shares are issued, will have been duly authorized, validly issued, fully paid and nonassessable; and the Shareholders shall receive good title to such shares, free and clear of any liens, options, charges, security interests or other legal or equitable rights and encumbrances of any nature whatsoever. 23 25 4.06 Disclosure. No representation or warranty by Brim or Newsub in this Agreement and no statement contained in any document, certificate or other writing furnished by Brim or Newsub to PHC or any Shareholder in connection with the transactions contemplated hereby, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. ARTICLE V COVENANTS AND AGREEMENTS 5.01. Closing. On the Closing Date, PHC will deliver or cause to be delivered to Brim the following documents: (a) Resolutions of PHC's Board of Directors and a vote of PHC's shareholders, certified by the Secretary or Assistant Secretary of PHC, authorizing and approving the transactions contemplated herein; (b) Certified copies of the Charter or Articles of Incorporation of PHC and each Subsidiary and Certificates of Legal Existence or Good Standing, as applicable, with respect to PHC and each Subsidiary issued within the 10 days prior to the Closing Date by the Secretary of State (or other authorized official) in each of the States in which PHC and each Subsidiary is organized or qualified to do business as a foreign corporation as set forth more fully in the PHC Disclosure Documents; (c) True and correct copies of the Bylaws of PHC and each Subsidiary certified by the Secretary or Assistant Secretary of each as of the Closing Date; and (d) An opinion or opinions of counsel to PHC dated as of the Closing Date in substantially the form attached hereto as Exhibit 5.01(d). 5.02 Closing. On the Closing Date, in addition to the delivery of the Conversion Shares, Brim will deliver to PHC or cause to be delivered the following documents: 24 26 (a) Resolutions of Brim's and Newsub's Board of Directors and a vote of Newsub's shareholder, certified by the Secretary or Assistant Secretary of Brim and Newsub, respectively, authorizing and approving the transactions contemplated herein; (b) Certified copies of the Charter or Articles of Incorporation of Brim and Newsub and Certificates of Legal Existence or Good Standing, as applicable, with respect to Brim and Newsub issued within the 1O days prior to the Closing Date by the Secretary of State (or other authorized official) of their respective state of organization; and (c) An opinion or opinions of counsel to Brim dated as of the Closing Date in substantially the form attached hereto as Exhibit 5.02(c). ARTICLE VI MISCELLANEOUS 6.01. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be sent by registered or certified mail, postage prepaid, by overnight delivery, hand delivery or facsimile transmission to the following address: To Brim: Brim, Inc. 305 NE 102nd Avenue Portland, Oregon 97020 Attn: President Phone: 503-256-2070 Fax: 503-254-7619 To PHC: Principal Hospital Company 5123 Paddock Village Court A-12 Brentwood, Tennessee 37027 Attn: President Phone: 615-370-1377 Fax: 615-370-9539 Notices shall be deemed given three (3) business days after deposit in the mail as provided herein or upon actual receipt if 25 27 sent by overnight delivery, facsimile transmission or hand delivery. 6.02. Assignment. Except as otherwise expressly provided herein, no party may assign, directly or indirectly, its rights or obligations hereunder without the prior written consent of the other parties. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns, including successors by operation of law pursuant to any merger, consolidation or sale of assets involving either party. 6.03. Sole Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the disclosure documents delivered pursuant hereto, and the documents executed and delivered pursuant hereto, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, discussions, writings and agreements between them. 6.04. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 6.05. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware. 6.06. Severability. Should any one or more of the provisions of this Agreement be determined to be invalid, unlawful or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. 6.07. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. 6.8. Third Party Beneficiary. Nothing in this Agreement express or implied is intended to and shall not be construed to confer upon or create in any person, other than the parties hereto, 26 28 any rights or remedies under or by reason of this Agreement, including without limitation, any right to enforce this Agreement. 6.09. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state or local statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean "including without limitation." 6.10. Survival. The representations and warranties of PHC shall not survive the Closing. * * * * 27 29 IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth therein. BRIM, INC. By: /s/ Martin S. Rash ------------------------------- Its: President & CEO ------------------------------ PRINCIPAL MERGER COMPANY By: /s/ Martin S. Rash ------------------------------- Its: President & CEO ------------------------------ PRINCIPAL HOSPITAL COMPANY By: /s/ Martin S. Rash ------------------------------- Its: President & CEO ------------------------------ 28 30 - ------------------------------------------------------------------------------- ANNEX A - ------------------------------------------------------------------------------- Principal Shares Outstanding Brim Shares To Be Issued - ------------------------------------------------------------------------------- Holder Class A Class B Junior Common ------ ------- ------- Preferred ------ --------- - ------------------------------------------------------------------------------- Golder, Thoma, Cressey, 13,178.52 13,580 Rauner Fund IV. L.P. - ------------------------------------------------------------------------------- 69,312 1,358,000 - ------------------------------------------------------------------------------- Martin S. Rash 211.26 217 - ------------------------------------------------------------------------------- 9,859 193,163 - ------------------------------------------------------------------------------- Richard D. Gore 395.36 407 - ------------------------------------------------------------------------------- 5,679 111,266 - ------------------------------------------------------------------------------- First Union 98.842 99.5 - ------------------------------------------------------------------------------- 520 9,960 - ------------------------------------------------------------------------------- AmSouth 98.842 99.5 - ------------------------------------------------------------------------------- 520 9,960 - ------------------------------------------------------------------------------- _________ _________ _______ _________ - ------------------------------------------------------------------------------- 13,982.82 85,890 14,403 1,682,349 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EX-2.3 4 AGREEMENT AND PLAN OF MERGER DATED 11-27-96 1 Exhibit 2.3 AGREEMENT AND PLAN OF MERGER dated as of November 27, 1996 by and among BRIM, INC. and BRIM SENIOR LIVING, INC. and ENCORE SENIOR LIVING, LLC and LEE ZINSLI, as Agent 2 AGREEMENT AND PLAN OF MERGER This Agreement is made and entered into as of this 27th day of November, 1996 by and among Brim, Inc., an Oregon corporation (the "Company"), Brim Senior Living, Inc., an Oregon corporation ("BSL"), Encore Senior Living, LLC, a Delaware limited liability company ("Purchaser"), and, for limited purposes as specified herein, Lee Zinsli, as Agent ("Agent"). A. By Investment Agreement dated November 21, 1996 among the Company, Golder, Thoma, Cressey, Rauner Fund IV, L.P. and Principal Hospital Company (the "Investment Agreement"), the Company has agreed to cause a redemption of its preferred stock and certain shares of its common stock (the "Healthcare Transaction"). B. By Purchase and Sale Agreement dated November 25, 1996, the Company has agreed to sell to Plaza Enterprises LLC, a newly formed limited liability company comprised of certain officers and employees of the Company certain assets and liabilities of the Company and certain of its subsidiaries, including BSL, which are not directly related to its health care or its senior living operations (the "Excluded Assets Transaction"). C. In conjunction with the consummation of the Healthcare Transaction, the Company has agreed with the prospective purchaser that at the closing of said transaction the assets and liabilities of the Company will exclude those related to its senior living operations. D. The Purchaser is interested in purchasing the BSL Senior Living Business (as defined below) from the Company, through (i) a merger of BSL, the Company's wholly owned subsidiary, into purchaser (the "Merger"), with Purchaser as the surviving entity (the "Surviving Entity") and (ii) the purchase by Purchaser of the Related Assets, subject to the Assumed Related Liabilities (the "Related Assets and Liabilities Transaction"). E. By Stock Purchase and Sale Agreement of even date herewith, CC-Lantana, Inc., a Delaware corporation, has agreed to purchase from the Company all of the stock of Meridian Senior Living, Inc., the sole general partner of Meridian Park Village Limited Partnership, and by a separate Purchase and Sale Agreement of even date herewith, James M. Williams and K. David McAllister have agreed to purchase from the Company its limited partnership interest in Meridian Park Village Limited Partnership (collectively, the "Freedom Village Transaction"). F. The parties are desirous of documenting the terms and conditions upon which the Merger and the Related Assets and Liabilities Transaction shall occur. NOW, THEREFORE, in consideration of the foregoing premises and the undertaking the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: 2 3 ARTICLE I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: "ADA"-- as defined in Section 4.23 hereof. "Advance Reimbursement" -- the payment at Closing, in immediately available funds, of an amount equal to the aggregate of all amounts expended by the Company, or loaned by the Company to, and expended by, BSL, as the case may be, for out-of-pocket, third party costs and expenses paid in respect of the Development Projects, but only to the extent that any such amount is paid or expended in accordance with (A)(i) an Approved Budget for a Development Project, in the case of all of the Development Projects other than the DeAnza and Mesa Development Projects, or (ii) in the case of the Mesa and DeAnza and Development Projects, an amendment to the Approved Budget for a Development Project increasing such costs, if approved in writing by Purchaser after the date hereof (but only to the extent such costs and expenses are not otherwise financed pursuant to leases covering an applicable Facility) and (B) all otherwise applicable provisions hereof. All amounts included in an Advance Reimbursement shall be itemized in the Advance Reimbursement Schedule. Advance Reimbursements shall not include, and neither BSL nor the Purchaser (nor any of their Affiliates) shall have any liability for, interest with respect to any advance made by the Company. "Advance Reimbursement Schedule" - as defined in Section 2.06(b) hereof. "Agent" -- Lee Zinsli, on behalf of the Former Holders. "Agent/Legal Fees Expense Account" -- as defined in Section 2.07(c) hereof. "Agreement" -- this Agreement. "Approved Budget for a Development Project" -- with respect to each Development Project, the budget and cost itemization therefor as included in Schedule 2 hereto and such additional or amended budgets and cost itemizations for such Project as shall be approved by (and shall be effective upon) the execution of a written acknowledgment thereof by both the Company and the Purchaser. "Approved Business Plan" -- the Business Plan developed by the management of the Purchaser prior to the date hereof and approved by Purchaser, a copy of which is attached as an exhibit to the Operating Agreement. "Assumed Related Liabilities" -- the liabilities of the Company relating to the BSL Senior Living Business listed on Schedule 3 attached hereto. 3 4 "Benefit Arrangement"-- any written or oral employment, consulting, severance or other similar contract, arrangement or policy and each plan, arrangement, program, agreement or commitment providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including, without limitation, any "voluntary employees' beneficiary association" as defined in Section 5O1(c)(9) of the Code providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or benefits other than salary, which: (i) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (ii) is entered into, maintained, contributed to or required to be contributed to by the Company or any of its Subsidiaries or under which the Company or any of its Subsidiaries may incur any liability, and (iii) covers any employee or former employee of the Company or any of its Subsidiaries (with respect to their relationship with such entities). "Brim/Senior Living Escrow Account"-- as defined in Section 2.07(b) hereof. "BSL" -- as defined in the preamble hereof. "BSL Assets" -- the interests of BSL in the BSL Facilities, the BSL Leases, the BSL Management Contracts, BSL's partnership or member's interest in the BSL Partnerships, the Development Projects, and all other assets of BSL, whether tangible or intangible, including, without limitation, accounts receivable, inventory and other working capital items, and all furniture, fixtures and equipment. The BSL Assets are identified on Schedule 4 attached hereto. "BSL Facility(ies)" -- the senior living facilities and other health care facilities owned or leased by BSL, the Development Projects, and all components of such Facilities and Development Projects. The BSL Facilities are listed on Schedule 5 attached hereto. "BSL Lease(s)" -- those leases to which BSL is a party with respect to senior living and other health care facilities. The BSL Leases are described on Schedule 6 attached hereto. "BSL Managed Facility(ies)" -- the senior living facilities and other health care facilities managed by BSL, which facilities are described on Schedule 7 attached hereto. "BSL Management Contract(s)" -- the agreements to which BSL is (or after giving effect to the Related Assets and Liabilities Transaction will be) a party providing for management, administrative or other services to be rendered in connection with the operation, administration, or supervision of any senior living or other health care facility. The BSL Management Contracts 4 5 are described in Schedule 8 attached hereto. "BSL Partnership Agreement(s)"-- those partnership agreements and limited liability company operating agreements listed in Schedule 9 attached hereto under which BSL now holds or as of the Closing Date will hold a general and/or limited partnership interest or member's interest. "BSL Partnership(s)"-- each partnership and limited liability company that is the subject of a BSL Partnership Agreement. "BSL Permits" -- as defined in Section 4.11(a) hereof. "BSL Senior Living Business"-- the business of owning, operating and managing the BSL Facilities and the other BSL Assets, the BSL Managed Facilities, the Related Assets and the Assumed Related Liabilities, and, to the extent applicable, the assets of the BSL Partnerships. "Closing" -- the consummation of (i) the Merger at the Effective Time and (ii) the Related Assets and Liabilities Transaction contemplated by this Agreement to occur at the time of the Merger. "Closing Date" -- the date that the Closing occurs as determined in accordance with Article 3. "CMC"-- Care Management Corporation, a subsidiary of the Company which is involved in the BSL Senior Living Business. "Code"-- the Internal Revenue Code of 1986, as amended. "Common Stock" - as defined in Section 4.02(a) hereof. "Company Certificate"-- as defined in Section 2.04 hereof. "Company Disclosure Letter"-- the letter of even date herewith delivered by the Company to Purchaser and disclosing certain matters relating to the Company, BSL and the BSL Senior Living Business, which letter is identified by the Purchaser's acknowledgment thereof. "Company Financial Statements" - as defined in Section 4.05 hereof. "Confidentiality Agreement"-- as defined in Section 10.02 hereof. "Debt"-- indebtedness or obligations for borrowed money, financing or capitalized lease obligations, obligations in respect of letters of credit, surety or other bonds, sale and leaseback transactions, all indebtedness secured by a lien on any asset, and any other liabilities generally regarded as indebtedness for borrowed money in accordance with GAAP, or any guarantees thereof or similar undertakings regarding the indebtedness or obligations of another. 5 6 "Delaware Law" -- as defined in Section 2.01 hereof. "Development Projects" -- the real property and improvements to be constructed, furnished and equipped in accordance with the Approved Budgets for Development Projects, as from time to time approved by the Purchaser, including, but not limited to, all property (tangible and intangible) owned or to be acquired by BSL or Purchaser in connection therewith. Each Development Project approved by Purchaser (which approval is limited in each case solely to Phase I of such Development Project, as described in Schedule I) is described in Schedule 1 attached hereto; with respect solely to Phase I of each Development Project listed on Schedule 1 hereto, BSL is authorized to proceed prior to the Closing Date in accordance with the terms of the Approved Budget for such Development Project. "Dispute Notice" -- as defined in Section 11.03 hereof. "EBITDA" -- earnings before interest, taxes, depreciation and amortization. "Effective Time" -- as defined in Section 2.02 hereof. "Employee Plans" -- all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. "Environmental Claims" -- all notices of violations, liens, claims, demands, suits, or causes of action for any damage, including, without limitation, personal injury, property damage (including, without limitation, any depreciation or diminution of property values), lost use of property or consequential damages, arising directly or indirectly out of Environmental Conditions or Environmental Laws. By way of example only (and not by way of limitation), Environmental Claims include: (i) violations of or obligations under any contract related to Environmental Laws or Environmental Conditions between the Company (or BSL, CMC or a BSL Partnership) and any other person, (ii) actual or threatened damages to natural resources, (iii) claims for nuisance or its statutory equivalent, (iv) claims for the recovery of response costs, or administrative or judicial orders directing the performance of investigations, responses or remedial actions under any Environmental Laws, (v) requirements to implement "corrective action" pursuant to any order or permit issued pursuant to the Resource Conservation and Recovery Act, as amended, or similar provisions of applicable state law, 6 7 (vi) claims related to Environmental Laws or Environmental Conditions for restitution, contribution, or indemnity, (vii) fines, penalties or liens of any kind against property related to Environmental Laws or Environmental Conditions (viii) claims related to Environmental Laws or Environmental Conditions for injunctive relief or other orders or notices of violation from federal, state or local agencies or courts, and (ix) with regard to any present or former employees, claims relating to exposure to or injury from Environmental Conditions. "Environmental Conditions" -- the state of the environment, including natural resources (e.g., flora and fauna), soil, surface water, ground water, any present or potential drinking water supply, subsurface strata or ambient air, relating to or arising out of the use, handling, storage, treatment, recycling, generation, transportation, release, spilling, leaking, pumping, pouring, emptying, discharging, injecting, escaping, leaching, disposal, dumping or threatened release of Hazardous Substances, by the Company, BSL, CMC or a BSL Partnership or its or their predecessors in interest, or by its or their agents, representatives, employees or independent contractors when acting in such capacity on behalf of any one or more of the Company, BSL, CMC or a BSL Partnership. With respect to environmental Claims by third parties, Environmental Conditions also include the exposure of persons to Hazardous Substances at the work place or the exposure of persons or property to Hazardous Substances migrating from or otherwise emanating from or located on any of the BSL Facilities or BSL Managed Facilities. "Environmental Laws" -- all applicable federal, state, district, local and foreign laws, all rules or regulations promulgated thereunder, and all orders, consent orders, judgments, notices, permits or demand letters issued, promulgated or entered pursuant thereto, relating to pollution or protection of the environment (including, without limitation, ambient air, surface water, ground water, land surface, or subsurface strata), including, without limitation, (i) laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, industrial materials, wastes or other substances into the environment and (ii) laws relating to the identification, generation, manufacture, processing, distribution, use, treatment, storage, disposal, recovery, transport or other handling of pollutants, contaminants, chemicals, industrial materials, wastes or other substances. Environmental Laws shall include, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), the Toxic 7 8 Substances Control Act, as amended ("TSCA"), the Hazardous Materials Transportation Act, as amended, the Resource Conservation and Recovery Act, as amended ("RCRA"), the Clean Water Act, as amended, the Safe Drinking Water Act, as amended, the Clean Air Act, as amended, the Atomic Energy Act of 1954, as amended, the Occupational Safety and Health Act, as amended ("OSHA"), the Hazardous Substance Account Act, California Health and Safety Code ss. 25300, et seq., the Hazardous Waste Control Law, California Heath and Safety Code ss. 25100, et seq., and the Porter-Cologne Water Quality Control Act, California Water Code ss. 13000 et seq., and all analogous laws promulgated or issued by any state or other governmental authority. "Environmental Reports" -- any and all written analyses, summaries or explanations, in the possession or control of the Company, BSL, CMC or a BSL Partnership of (a) any Environmental Conditions in, on or about the BSL Facilities or BSL Managed Facilities or (b) the compliance by the Company, BSL, CMC or a BSL Partnership with Environmental Laws. "ERISA" -- the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" -- any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with or under "common control," as defined in Section 414(b), (c), (m), (n) or (o) of the Code, with the Company or any of its Subsidiaries. "Escrow Account" -- the Brim/Senior Living Escrow Account and the FV Escrow Account, collectively. "Escrow Agreement" -- an agreement in the form of Exhibit A hereto. "Escrowee"-- Key Bank of Oregon. "Excluded Assets Transaction"- as defined in Recital B hereof. "Facilities" -- the BSL Facilities and the BSL Managed Facilities. "Financial Statement Loss Threshold"-- as defined in Section 11.05(a) hereof. "Former Holders"-- the Former Holders of the Redeemed Stock, GECC, and the former holders of the Accelerated Options and/or the Purchased Options (as such terms are defined in the investment Agreement). "Former Holders of the Redeemed Stock"-- the shareholders of the Company whose junior preferred stock is redeemed at the Closing of the Healthcare Transaction. "Freedom Village Transaction"-- as defined in Recital E hereof. "FV Escrow Account"-- the FV Escrow Account established with the Escrowee in accordance 8 9 with the Escrow Agreement and the documents relating to the Freedom Village Transaction. "GAAP" -- generally accepted accounting principles in effect as of the date hereof or, in the case of any Company Financial Statement, in effect as of the date thereof. "GECC" -- General Electric Capital Corporation. "Governmental Authority" -- any court, tribunal, arbitrator, authority, agency, department, commission, office, official or other federal, state, county, city or other governmental instrumentality or any state, county, city or other political subdivision. "Hazardous Substance(s)" -- all pollutants, contaminants, chemicals, wastes, and any other carcinogenic, ignitable, corrosive, reactive, toxic or otherwise hazardous substances or materials (whether solids, liquids or gases) subject to regulation, control or remediation under Environmental Laws. By way of example only, the term Hazardous Substances includes: petroleum; urea formaldehyde; flammable, explosive and radioactive materials, as defined in any of the Environmental Laws; PCBs; pesticides; herbicides; asbestos; and sludge, slag, acids, metals, solvents and waste waters listed or otherwise defined as hazardous under any of the Environmental Laws. "Healthcare Transaction" -- as defined in Recital A hereof. "Income Taxes" -- any and all foreign, federal, state and local taxes, levies, duties and other assessments or charges of a similar nature (whether imposed directly or through withholding), to the extent based upon or measured by income, including any interest, penalties or other additions to tax applicable thereto. "Indemnified Party" -- as defined in Section 11.03 hereof. "Independent Accountants" -- the Portland, Oregon, office of KPMG Peat Marwick LLP. "Interim Financial Statements" -- as defined in Section 4.05 hereof. "Key Employees" -- all officers, managers and other employees of the Company or any of its Subsidiaries (with respect to the BSL Senior Living Business) or BSL, CMC or a BSL Partnership involved as of the date hereof and anticipated to be involved from and after the Effective Time in the day to day operations of the BSL Senior Living Business, whose current annual salary or rate of compensation (including bonus and other incentive compensation) is $100,000 or more. "Laws" -- any constitution statute, law, rule, regulation or ordinance. "Liens" -- any liens, security interests, deeds of trust, pledges, charges, conditional sales 9 10 contracts, mortgages or encumbrances. "Limitation Period"-- as defined in Section 11.05(a) hereof. "Limited Partnership Transaction"-- as defined in the agreement relating to the Freedom Village Transaction. "Loss Notice"-- as defined in Section 11.03 hereof. "Losses" -- any and all claims, damages, losses, expenses, deficiencies, penalties, interest, fines, costs (including reasonable attorneys' fees and court costs), obligations or liabilities of any kind suffered or incurred because of a breach of one or more of the representations, warranties and covenants set forth in this Agreement or because of one or more Third Party Claims. "Loss Threshold"-- as defined in Section 11.05(a) hereof. "Material Adverse Effect"-- any event or events (A) adversely affecting (i) the BSL Assets by $150,000 or more, or (ii) the business operations or affairs of the BSL Senior Living Business, or the prospects of the BSL Senior Living Business as reflected in the Approved Business Plan, in either case having an adverse effect (after taking into account any events or series of events having a positive effect) on EBITDA for any consecutive 12-month period covered by the Approved Business Plan, in excess off $150,000, (B) materially adversely affecting the ability of the Company or BSL to perform its obligations hereunder, or (C) otherwise materially adversely affecting the BSL Senior Living Business. "Merger Consideration"-- the dollar amount determined by deducting the amount of the Related Assets Consideration from Fifteen Million Dollars ($15,000,000). "Merger" -- the Merger described in Section 2.2, as defined in Recital D hereof. "Multiemployer Plan" -- any "multiemployer plan" as defined in Sections 3(37) or 400l(a)(3) of ERISA: (i) which any of the Company and its Subsidiaries, or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the six years prior to the Closing Date maintained, administered, contributed to or was required to contribute to, or under which any of the company and its Subsidiaries or any ERISA Affiliate may incur any liability; and (ii) which covers any employee or former employee of any of the Company and its Subsidiaries or any ERISA Affiliate (with respect to their relationship with such entities). "Operating Agreement" -- the limited liability company operating agreement of Encore Senior 10 11 Living LLC, of even date herewith by and among Rockwood Living Inc., CTK Capital Corp., SSS Capital Corp., Bruce A. Schoen, Craig J. Rhea, Rick D. McDaniel, Encore Investors LLC and A.E. Brim. "Orders" -- any injunction, judgment, decree, order, or writ. "Oregon Act" -- as defined in Section 2.02 hereof. "Other Required Agreements"-- as defined in Section 7.01(k) hereof. "Outside Closing Date"-- as defined in Section 3.01 hereof. "Pension Plan" -- any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan): (i) which any of the Company and its Subsidiaries or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or within the five years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which any of the Company and its Subsidiaries or any ERISA Affiliate may incur any liability; and (ii) which covers any Employee or former employee of any of the Company and its Subsidiaries or any ERISA Affiliate (with respect to their relationship with such entities). "Permitted Exceptions" -- (i) any liens for taxes and assessments not yet due and payable; (ii) liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, construction or similar liens arising by operation of law in respect of obligations that are not yet due or that are being contested in good faith and for which adequate reserves have been provided for on the Pro Forma Balance Sheet; (iii) liens associated with purchase money security interests, provided, in each case, that the associated liability has been provided for on the Pro Forma Balance Sheet or has been established in relation to assets purchased subsequent to the date of such Pro Forma Balance Sheet; (iv) easements, reservations, rights-of-way, restrictions, covenants, conditions and other similar encumbrances whether of record or apparent on the premises, including, but not limited to road, highway, pipeline, railroad and utility easements and defects in the title which individually or in the aggregate do not materially and adversely affect the present use, marketability or insurability (under the terms of an applicable title insurance policy) of any 11 12 Facility; and (v) any Liens disclosed in the Title Reports. "Personnel" -- as defined in Section 4.06(b). "Pro Forma Balance Sheet" -- as defined in Section 4.05 hereof. "Related Assets Consideration" -- an amount equal to the book value of the Related Assets as of the Closing Date. "Related Assets" -- the stock of CMC and the other assets described on Schedule 1O hereto. "Related Assets and Liabilities Transaction"-- as defined in Recital D hereof. "Rights" -- as defined in Section 4.02(a) hereof. "Subsidiary" -- a corporation, partnership or other entity (excluding the BSL Partnerships) 20% or more of the voting power or value of which is owned by the referenced corporation, partnership or other entity, "Surviving Entity" -- the Purchaser, as constituted following the Merger, as defined in Recital D hereof. "Taxes" -- any and all foreign, federal, state and local taxes, levies, duties and other assessments or charges of a similar nature (whether imposed directly or through withholding), including any interest, penalties or additions to tax applicable thereto. "Third Party Consents" -- as defined in Section 6.03(f) hereof. "Third Party Claim" -- as defined in Section 11.03 hereof. "Title Reports" -- the title reports and title insurance policies described in Schedule 11 attached hereto. "Welfare Plan" -- any "employee welfare benefit plan" as defined in Section 3(1) of ERISA: (i) which any of the Company and any of its Subsidiaries or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which any of the Company and any of its Subsidiaries or any ERISA Affiliate may incur any liability; and (ii) which covers any employee or former employee of any of the Company and any of its Subsidiaries or any ERISA Affiliate (with respect to their relationship with such 12 13 entities). Other References. References to articles, sections (or any subsections), schedules or exhibits are to those of this Agreement unless otherwise indicated. ARTICLE II THE MERGER AND THE SALE TRANSACTIONS The Merger. On the Closing Date, BSL shall be merged into Purchaser in accordance with the terms hereof: 2.01 Effect of the Merger. In accordance with the provisions of this Agreement and the Delaware Corporation Law (the "Delaware Law"), at the Effective Time (as defined in Section 2.02 hereof), (i) BSL shall be merged with and into Purchaser; (ii) the separate existence of BSL shall cease; and (iii) the Surviving Entity shall continue its corporate existence under the laws of the State of Delaware. 2.02 Effective Time of the Merger. Articles of Merger shall be filed with the Offices of the Secretary of State of Delaware and Oregon in accordance with the Delaware Act and the Oregon Business Corporation Act (the "Oregon Act") on the Closing Date. The "Effective Time" shall occur at such time as the Merger shall have become effective in Delaware and Oregon. Notwithstanding the foregoing or anything herein to the contrary, prior to the Closing Date BSL may be reincorporated in the State of Delaware in which event the Merger shall be in accordance with Delaware law, provided that the Company and Purchaser, each acting in its sole discretion, agrees to such reincorporation and to the documents by which the same is to be accomplished. 2.03 Certificate of Formation and Operating Agreement. At the Effective Time: (i) the Certificate of Formation of Purchaser as in effect immediately prior to the Effective Time shall be the Certificate of Formation of the Surviving Entity; and (ii) the Operating Agreement of the Purchaser in effect immediately prior to the Effective Time shall be the Operating Agreement of the Surviving Entity. 2.04. Conversion and Exchange of Stock at Closing. At or before the Effective Time, the Company shall surrender to the Purchaser certificates representing all of the issued and outstanding shares of capital stock of BSL (collectively, the "Company Certificate"). At the Effective Time, by virtue of the Merger and without any action on the part of the Company: (a) all shares of BSL common stock which are held in treasury shall be canceled; (b) all issued and outstanding shares of capital stock of BSL (other than shares canceled pursuant to subsection (a) above) shall be converted into the right to receive the Merger 13 14 Consideration as hereinafter provided. 2.05. Deposit of Consideration: Exchange of Certificates. At and after the Effective Time, the Company shall cease to have any rights as a shareholder of BSL, except for the right to surrender the Company Certificate and to receive the Merger Consideration, in accordance with the terms hereof, and the stock transfer books of BSL shall be closed, and there shall be no further transfer of shares of BSL capital stock which were outstanding immediately before the Effective Time. 2.06. Other Conveyances. (a) At the Effective Time, the Company shall transfer and deliver to Purchaser, pursuant to conveyancing documents in form and substance reasonably satisfactory to Purchaser and executed by the Company and Purchaser, as appropriate, all of the stock of CMC and all of the other Related Assets, and the Purchaser shall assume all of the Assumed Related Liabilities. In exchange therefor, the Company shall be entitled to receive from the Purchaser the Related Assets Consideration, as hereinafter provided. (b) At or before the Effective Time, the Company shall deliver to Purchaser a schedule which itemizes all amounts to be included in the Advance Reimbursement (the "Advance Reimbursement Schedule"), together with the lien waivers, releases and subordinations required under Section 6.01(q) hereof. 2.07. Payment Procedures. At the Effective Time, upon compliance with Sections 2.04, 2.05 and 2.06 hereof, Purchaser shall pay the Merger Consideration, the Advance Reimbursement and the Related Assets Consideration by delivering: (a) Fourteen Million Two Hundred Thousand and no/100 Dollars ($14,200,000), plus the Advance Reimbursement, by wire transfer, in immediately available funds, to a bank account designated by the Company; (b) Seven Hundred Fifty Thousand and no/100 Dollars ($750,000), by wire transfer, in immediately available funds, to an interest bearing escrow account established with the Escrowee and designated as the "Brim/Senior Living Escrow Account" to be held and applied by the Escrowee in accordance with the terms of this Agreement and the Escrow Agreement; and (c) Fifty Thousand and no/100 Dollars ($50,000), by wire transfer, in immediately available funds, to an interest bearing escrow account established with the Escrowee and designated as the "Agent/Legal Fees Expense Account" to be held and applied by the Escrowee in accordance with the terms of the agreement applicable to such account. The Company acknowledges and agrees that the Purchaser's obligation to pay the Merger Consideration, the Advance Reimbursement and the Related Assets Consideration shall be fully 14 15 satisfied upon completion of the above-described wire transfers. ARTICLE III CLOSING 3.01 Deliveries by the Company at Closing. In the event all of the conditions to Closing set forth in Articles VII and VIII have been satisfied or waived, the Company shall deliver all certificates, documents, exhibits, schedules, and other instruments required to be delivered at Closing by the Company or its counsel pursuant to this Agreement, each of which shall be fully executed and completed, as appropriate. 3.02 Deliveries by Purchaser at Closing. In the event all of the conditions to Closing set forth in Articles VII and VIII have been satisfied or waived, Purchaser shall deliver and/or cause its designees to deliver all of the certificates, documents, exhibits, schedules, and other instruments required to be delivered at Closing by Purchaser and/or its designees or its or their counsel, pursuant to this Agreement, each of which shall be fully executed and completed, as appropriate and shall remit or cause to be remitted to the Company the consideration described in Section 2.07. 3.03 Time and Place. The Closing shall occur at the Chicago offices of Latham & Watkins at 10:00 am, local time, on December 13, 1996, provided that as of said date all of the conditions to Closing set forth in Articles VII and VIII have been satisfied by the responsible party or waived by the party entitled to waive the same (the "Closing Date"), or at such other time or on such other date or such other place as the Company and Purchaser may mutually agree, but in no event later than December 17, 1996 (the "Outside Closing Date"). In the event all of the conditions to Closing have not been satisfied or waived as of the Outside Closing Date, either party shall thereafter have the right to terminate this Agreement in accordance with the terms of Article X hereof. ARTICLE IV THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company and BSL jointly and severally represent and warrant to Purchaser as follows: 4.01. Organization and Qualification. (a) The Company is a corporation duly organized and validly existing under the laws of the State of Oregon. (b) Each of BSL and CMC is a corporation duly organized and validly existing under the laws of the State of Oregon (provided that BSL may reincorporate in the State of Delaware 15 16 prior to the Closing if the parties agree to same as provided herein). Each of BSL and CMC has all corporate power and authority necessary to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties. (c) Each of BSL and CMC is duly qualified, licensed or admitted to do business and in good standing (to the extent "good standing" is applicable in each jurisdiction) in each jurisdiction in which the ownership, use or leasing of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary. Section 4.01(c) of the Company Disclosure Letter sets forth the foreign jurisdictions in which BSL and CMC are qualified to do business. (d) Each BSL Partnership is duly formed and validly existing in the state of its formation and licensed or admitted to do business and is in good standing (to the extent good standing is applicable in each jurisdiction) in each jurisdiction in which the ownership, use, or leasing of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing, or admission necessary. (e) Neither BSL nor CMC has any direct or indirect Subsidiaries, and neither of them owns, directly or indirectly, any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any partnership, limited liability company, joint venture or other business association or entity. Neither BSL nor CMC will have any Subsidiaries on the Closing Date. 4.02. Capital Stock. (a) The authorized capital stock of BSL consists solely of 1,000 shares of common stock, without par value, 100 of which are issued and outstanding. All of such issued and outstanding shares of common stock are owned beneficially and of record by the Company (the "Common Stock") free and clear of all Liens, claims and encumbrances and with full right, power and authority to transfer such shares to the Purchaser. There are no outstanding subscriptions, options, warrants, rights (including "phantom" stock rights), preemptive rights or other contracts, commitments, understandings or arrangements, including any right of conversion or exchange under any outstanding security, instrument or agreement (together, "Rights"), obligating BSL, CMC or any BSL Partnership to issue or sell any shares of its capital stock or to grant, extend or enter into any Right with respect thereto nor any voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person with respect to the voting of or the right to participate in dividends or other earnings on any capital stock or other equity security of or interest in BSL, CMC or any BSL Partnerships. (b) The outstanding shares of Common Stock have been duly authorized, validly issued, fully paid and nonassessable. (c) There are no outstanding obligations by BSL, CMC or any BSL Partnership 16 17 provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any other person. 4.03. Authority Relative to this Agreement. Each of the Company and BSL has full corporate power and authority to enter into this Agreement and each other instrument, document and agreement necessary to consummate the transactions contemplated hereby and perform its obligations hereunder. The execution, delivery and performance of this Agreement by each of the Company and BSL and the consummation by each of them of the transactions contemplated hereby have been duly and validly approved by their respective Boards of Directors, and no other corporate proceedings are necessary to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, by either the Company or BSL, other than securing the approval of the Company's shareholders. The Company shall use its best efforts to secure required its shareholders' approval, including without limitation its shareholders' approval of the execution and delivery of this Agreement by the Agent and performance of the Agent's obligations hereunder, in accordance with the provisions of Section 6.01(j) hereof. Subject to obtaining such shareholder approval, this Agreement has been duly and validly executed and delivered by each of the Company, BSL and the Agent and constitutes a legal, valid and binding obligation of each of them and is enforceable against each of them in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.04. Approvals and Consents. The execution and delivery of this Agreement by the Company and BSL does not, and except as described in Section 4.04 of the Company Disclosure Letter and as described in Section 6.01(j) hereof, the performance by the Company and BSL of its or their obligations hereunder and the consummation of the transactions contemplated hereby will not: (a) conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or of notice under, any agreement, contract, lease, license, permit, note, instrument or other document to which the Company, any of its Subsidiaries, BSL, CMC or any BSL Partnership is a party or by which any of them is bound or to which any asset or property of any of them is subject, or (b) violate any Laws or Orders of a Governmental Authority, applicable to the Company, any of its Subsidiaries, BSL, CMC, any BSL Partnership or any of its or their respective assets or properties, or the articles of incorporation or bylaws (or other comparable charter or organizational documents, including the BSL Partnership Agreements) of the Company, any of its subsidiaries, BSL, CMC or any BSL Partnership, or (c) require any consent, approval or action of, or permit from, or filing, or registration 17 18 with or notice to any Governmental Authority or other public or private third party. 4.05. Financial Statements. (a) On or before the date hereof, the Company has delivered to Purchaser the following (collectively, the "Company Financial Statements"): (i) a true and complete copy of the audited consolidated balance sheet of the Company and its consolidated Subsidiaries, including BSL and CMC, as of December 31, 1995 and the related statements of operations, stockholders' equity, and cash flows and the report thereon by the Independent Accountants; (ii) a true and complete copy of the unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries, including BSL and CMC, as of June 30, 1996 and the related statements of operations, stockholders' equity and cash flow for the fiscal period ended on such date (the "Interim Financial Statements"); and (iii) an unaudited combined pro forma balance sheet of BSL and CMC as of June 30, 1996, giving effect to the transfers contemplated in the Related Assets and Liabilities Transaction and the Excluded Assets Transaction, and reviewed by the Independent Accountants (the "Pro Forma Balance Sheet"). The parties have executed an acknowledgment identifying the Pro Forma Balance Sheet and the Interim Financial Statements. The Company Financial Statements were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto), are in conformity with the books and records of the Company, and fairly present the consolidated financial position of the Company and its consolidated Subsidiaries, including BSL and CMC (or BSL and CMC and the other Related Assets, in the case of the Pro Forma Balance Sheet), as at the respective dates thereof and the consolidated or combined, as applicable, results of their operations, stockholders' equity and cash flows for the respective periods then ended. (b) The amount of stockholders' equity, as shown in an unaudited combined balance sheet of BSL and CMC to be prepared by Purchaser (as contemplated by Section 11.05 hereof) as of the Closing on the Closing Date (on the same basis as the Pro Forma Balance Sheet, i.e., by giving effect to the transfers contemplated in the Related Assets and Liabilities Transaction and the Excluded Assets Transaction and by excluding the effect of the merger of BSL into the Purchaser), will not be less than the amount of stockholders' equity shown in the Pro Forma Balance Sheet. 4.06. Absence of Certain Changes or Events. Except as set forth in Section 4.06 of the Company Disclosure Letter, or as permitted by Article 6, since June 30, 1996 there has not been any: 18 19 (a) (i) change, event or development having, or that would be reasonably expected to have an adverse effect on the Company with respect to the BSL Senior Living Business and/or on BSL, CMC or any BSL Partnership except in the ordinary course of business consistent with past practice and involving not more than $100,000 in the aggregate. Nothing herein shall be construed as requiring the Company to disclose to Purchaser generally known changes in the senior living business which may, could or would have an effect on the Company, BSL or Purchaser either prior to or after the Closing, it being understood and agreed that Purchaser and its members are sophisticated investors in and purchasers of companies in the senior living business and can and will keep themselves advised as to any such general developments. (b) (i) except for normal periodic increases in the ordinary course of business consistent with past practice, increase in the compensation payable or to become payable by the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership to any of its officers, employees or former employees or individuals involved in the BSL Senior Living Business (collectively, "Personnel"). (ii) grant, payment or accrual, contingent or otherwise, for or to the credit of any of the Personnel with respect to any bonus, incentive compensation, service award or other like benefit; (iii) adoption, creation or amendment of any Employee Plan of BSL or CMC; (iv) employment agreement (written or verbal) made by the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership or to which any of them is a party; or (v) other change in employment terms for any of the Personnel; (c) sale, lease, assignment or transfer of any of the Facilities, the BSL Leases, the BSL Management Contracts, BSL's partnership or member interests in the BSL Partnerships, the Development Projects or the Related Assets. (d) cancellation, compromise, waiver or release of any right or claim (or series of related rights or claims) of BSL, CMC or the BSL Senior Living Business except with respect to the Excluded Assets, and except in the ordinary course of business consistent with past practice and involving not more than $100,000 in the aggregate. (e) amendment, cancellation or termination of any agreement, contract, permit, license, note, instrument or other document or arrangement of the Company and its Subsidiaries (with respect to the BSL Senior Living Business), BSL, CMC, any BSL Partnership or the BSL Senior Living Business, except in the ordinary course of business consistent with past practice and involving not more than $100,000 in the aggregate. 19 20 (f) capital expenditure or the execution of any lease, contract, license, sublease or sublicense (or series of related contracts, leases, subleases, licenses and sublicenses) or any incurring of liability therefor by the Company and its Subsidiaries (with respect to the BSL Senior Living Business), BSL, CMC, or any BSL Partnership, except with respect to the Excluded Assets and the Development Projects, and except in the ordinary course of business consistent with past practice and involving not more than $100,000 in the aggregate. (g) failure to operate the BSL Senior Living Business in the ordinary course consistent with past practice, which failure has resulted in an adverse effect with respect to (i) the preservation of the BSL Senior Living Business, (ii) the availability to the Purchaser of the services of the Personnel involved in the BSL Senior Living Business or of BSL or CMC or (iii) the preservation for Purchaser of the goodwill of suppliers, customers, distributors and others having business relations with the Company with respect to the BSL Senior Living Business or BSL or CMC; (h) change in accounting methods or practices by the Company (with respect to the BSL Senior Living Business), BSL or CMC; (i) grant of a lien, mortgage, pledge or other encumbrance on any of the Related Assets or the BSL Assets, or the assets of any BSL Partnership, other than Permitted Exceptions; (j) declaration, setting aside for payment or payment of any dividend or distribution in respect of any capital stock of BSL or CMC or interest in any BSL Partnership or any redemption, purchase, or other acquisition of any of BSL's, CMC's or any BSL Partnership's equity securities or interests except distributions made in accordance with the applicable provisions of the BSL Partnership Agreements; (k) Debt, or any commitment to incur Debt, or any loan or guarantee incurred, entered into, made or agreed to be made by the Company and its Subsidiaries (with respect to the BSL Senior Living Business) or by BSL, CMC or any BSL Partnership, except for intercompany Debt with respect to the Development Projects; (l) liabilities incurred (other than for Debt) except as part of the Development Projects and except in the ordinary course of business and consistent with past practice and involving not more than $100,000 in the aggregate; (m) acceleration, termination, material modification, cancellation or threatened acceleration, termination, material modification or cancellation of any contract involving more than $100,000 in the aggregate to which the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership is a party or by which any of them is bound or to which any of the assets or properties of any of them is subject; (n) grant of any license or sublicense of any rights under or with respect to any 20 21 intellectual property rights of the Company which relate to the BSL Senior Living Business or of BSL or CMC; (o) written agreement or, to the knowledge of the Company or BSL, oral agreement by the Company or BSL or any Key Employee to do any of the foregoing; or (p) other event or condition of any character (other than events or conditions affecting the economy generally or the senior living business generally and other than events in the ordinary course of business) known to the Company or BSL that individually or in the aggregate would reasonably be expected to have an effect that is materially adverse on BSL, CMC, a BSL Partnership or the BSL Senior Living Business. 4.07 Accounts Receivable. The accounts receivable of BSL reflected on the Pro Forma Balance Sheet, and all accounts receivable arising since the date of the Pro Forma Balance Sheet, represent bona fide claims against debtors for sales made, services performed or other charges arising on or before the date hereof, all the goods delivered and services performed that gave rise to said accounts were delivered or performed in accordance with the applicable orders, contracts or customer requirements in all material respects, and all of such accounts are collectible in the ordinary course of business or adequate loss reserves therefor have been established. 4.08 Inventories. The values at which inventories of BSL are shown on the Pro Forma Balance Sheet have been determined in accordance with the normal valuation policy of the Company as described in the Company Financial Statements, consistently applied, and in accordance with GAAP. The inventories (and items of inventory acquired subsequent to June 30, 1996) consist only of items of quality and quantity commercially usable and salable in the ordinary course of business except for any items of obsolete material or material below standard quality, all of which have been written down to realizable market value, or for which adequate reserves have been provided on the Pro Forma Balance Sheet. All inventories not written off have been priced at cost on a first in, first out basis. The inventory and consumable supplies located at and used in connection with the operation of the BSL Facilities are in a good and useable condition in all material respects and sufficient in quantity and quality to operate those BSL Facilities which are currently operational in a manner consistent with the past practices of the Company and BSL. 4.09. Legal Proceedings. (a) Except as set forth in Section 4.09(a) of the Company Disclosure Letter, there is no charge, complaint, action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, investigation, audit, proceeding, labor dispute or arbitration proceeding (collectively, "Actions") pending or, to the knowledge of the Company or BSL, threatened or anticipated before any court, arbitrator or other public or private tribunal or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, relating to or affecting: 21 22 (i) BSL, CMC or a BSL Partnership, the BSL Assets or the assets of CMC or a BSL Partnership, or the operation of the BSL Senior Living Business as currently operated, (ii) any Employee Plan of CMC or any trust or other funding instrument, fiduciary or administrator thereof, or (iii) the transactions contemplated by this Agreement, (b) Neither the Company nor its Subsidiaries (with respect to the BSL Senior Living Business) nor BSL nor CMC nor any BSL Partnership is in default with respect to any Order of any Governmental Authority with respect to the BSL Senior Living Business and there are no unsatisfied uninsured judgments against the Company and its Subsidiaries, BSL, CMC or any BSL Partnership. 4.10. Information Supplied. Each document filed by the Company, any Subsidiary of the Company, BSL, or CMC or by any of them on behalf of the BSL Partnerships with any Governmental Authority in connection with this Agreement and the other transactions contemplated hereby does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by the Company or BSL with respect to information supplied in writing by or on behalf of Rockwood Living, Inc. or the Rockwood Living, Inc. Affiliates of Purchaser expressly for inclusion therein. 4.11. Compliance with Laws and Orders. (a) BSL or the applicable BSL Partnership holds all permits, licenses, variances, exemptions, orders and approvals of all Governmental Authorities necessary for the leasing, management or operation of the BSL Facilities (other than the Development Projects) and the BSL Managed Facilities and for the lawful conduct of the BSL Senior Living Business (the "BSL Permits"). (b) BSL or the applicable BSL Partnership is in compliance in all material respects with the terms of the BSL Permits held by it, and is not in violation of or default under any Law or Order of any Governmental Authority applicable to it. 22 23 4.12. Compliance with Agreements: Certain Agreements. (a) Except as disclosed in Section 4.12(a) or 4.12(b) of the Company Disclosure Letter, none of the Company or its Subsidiaries (with respect to contracts that relate to the business, assets, prospects or operations of BSL, CMC or the BSL Senior Living Business) or BSL, CMC or any BSL Partnership is a party to, or bound by, any contract of any kind to be performed after the Closing Date pursuant to which it is obligated to spend more than $50,000 in any twelve month period and which is not subject to cancellation by it on thirty (30) or fewer days' notice. (b) Section 4.12(b) of the Company Disclosure Letter lists the following contracts to which the Company (with respect to contracts that relate to the BSL Senior Living Business) or BSL, CMC or a BSL Partnership is a party: (i) each BSL Management Contract; (ii) each BSL Lease; (iii) each BSL Partnership Agreement; (iv) each agreement, contract or arrangement with any consultant, not terminable on 30 days' or less notice involving the payment of more than $50,000 per annum except architect agreements and contractor agreements for the Development Projects; (v) each union or collective bargaining agreement; (vi) each agreement contract, arrangement, commitment or obligation with any employee the benefits of which are contingent or vest, or the terms of which are materially altered, upon the occurrence any of the transactions contemplated by this Agreement; (vii) each agreement, contract, arrangement, commitment or obligation with respect to any Key Employee involved in the BSL Senior Living Business other than salaries and benefits paid in the ordinary course of business; (viii) each agreement or plan, including any bonus, incentive compensation, stock option, stock appreciation right, restricted stock or stock purchase agreement or plan, any of the benefits of which will be increased by, vested on an accelerated basis as a result of, or calculated or valued based on the occurrence of any of the transactions contemplated by this Agreement. It is understood and agreed that all of the foregoing in this clause (viii) is the responsibility of the Company; (ix) each agreement, contract arrangement, commitment or obligation to which it is a party limiting in any material respect its freedom or the freedom of any Key 23 24 Employee to compete in any line of business with any person; (x) each agreement, contract, arrangement, commitment or obligation evidencing any liability for Debt in excess of $100,000; (xi) each agreement, contract, arrangement, commitment, understanding or obligation relating to it, its present or prospective business, operations, properties or assets in which any Key Employee has any interest, direct or indirect, including a description of any transactions between it and any Key Employee or any entity in which any Key Employee has any interest (other than transactions between any corporation and a publicly held corporation in which the Key Employee holds less than five percent (5%) of the issued and outstanding shares of capital stock); and (xii) each oral contract or agreement with respect to any of the matters referred to in the foregoing clauses (i) through (xi) and any oral or written proposal to enter into any contract, agreement or other arrangement with respect to any of the matters referred to in the foregoing clauses (i) through (xi). (c) The Company has delivered or made available to Purchaser a correct and complete copy of each contract or agreement listed in Section 4.12(b) of the Company Disclosure Letter. With respect to each written agreement listed, to the Company's knowledge (based on a review of the files related to the BSL Senior Living Business maintained at the corporate offices of the Company, BSL and CMC, inquiries of employees located at the corporate offices of the Company, BSL and CMC and involved in the BSL Senior Living Business, and inquiries of the onsite administrators at the facilities), (A) the written agreement is legal, valid, binding, enforceable (except as such enforceability may be limited by (i) bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting creditors' rights generally and (ii) the general principles of equity, regardless of whether asserted in a proceeding in equity or at law) and in full force and effect; (B) no party is in material breach or default, and no event has occurred which with notice or lapse of time or both could constitute a material breach or default or permit termination, modification or acceleration, under the written agreement and (C) no party has repudiated any term of the written agreement, and there are no pending renegotiations of or outstanding rights to renegotiate any material amounts paid or payable by or to the Company (with respect to the BSL Senior Living Business) or BSL, CMC or any BSL Partnership thereunder and no such person has made written demand for such renegotiation. 4.13 Employees and Employee Benefit Plans (a) Employees. Section 4.13(a) of the Company Disclosure Letter contains a complete and accurate list of the name, hire date, base compensation, bonus and title of Key Employees employed in the operation of the BSL Senior Living Business. Except as provided by applicable law, the employment of all persons presently employed or retained by the Company, any Company Subsidiary or BSL in the operation of the BSL Senior Living Business is 24 25 terminable at will, at any time and without advance notice. (b) Employee Plans. Section 4.13(b) of the Company Disclosure Letter contains a complete list of all Employee Plans. True and complete copies of each of the following documents for Employee Plans will be delivered to Purchaser by the Company subsequent to the date of this agreement but prior to the Closing Date: (i) each Welfare Plan and Pension Plan (and, if applicable, related trust agreements and summary plan descriptions, all amendments thereto, and all annuity contracts or other funding instruments), (ii) each Benefit Arrangement and a complete description of any such Benefit Arrangement which is not in writing and, (iii) for the three most recent plan years, Annual Reports on Form 5500 Series required to be filed with any governmental agency for each Welfare Plan and Pension Plan. (c) Pension Plans. No Pension Plan is subject to the minimum funding requirements of Title I of ERISA or Section 412 of the Code or Title IV of ERISA. Except as disclosed in Section 4.13(c) of the Company Disclosure Letter, each Pension Plan and each related trust agreement, annuity contract or other funding instrument is qualified and tax-exempt under the provisions of Code Section 401(a) and 501(a) and has been so qualified during the period from its adoption to date. (d) Multiemployer Plans. None of the Company, BSL, CMC nor any ERISA Affiliate contributes to, or has been obligated to contribute to, any Multiemployer Plan. (e) Welfare Plans. None of the Company, BSL, CMC nor any ERISA Affiliate has any present or future obligation to make any payment to or with respect to any present or former employee of the Company involved in the BSL Senior Living Business or of BSL or CMC pursuant to any retiree medical benefit plan, other than as may be required by federal or state law. None of the Company, BSL, CMC or any ERISA Affiliate has ever maintained, contributed to or been required to contribute to any "welfare benefit fund" as defined in Section 419(e) of the Code in connection with the BSL Senior Living Business. Each Welfare Plan employed in connection with the BSL Senior Living Business which is a "group health plan" as defined in Section 607(a) of ERISA, has been operated in compliance with provisions of Part 6 of Title I of ERISA and Sections 162(i) and 4980B of the Code at all times. (f) Compliance with Law. Each Welfare Plan, Pension Plan and Benefit Arrangement which covers or has covered employees of the Company involved in the BSL Senior Living Business or the employees of BSL, CMC or any ERISA Affiliate involved in the BSL Senior Living Business has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable 25 26 to such Welfare Plan, Pension Plan or Benefit Arrangement, including but not limited to, ERISA and the Code. (g) Deductibility of Payments. There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company involved in the BSL Senior Living Business, BSL or CMC that, individually or collectively, provides for the payment by the Company, BSL or CMC of any amount: (i) that is not deductible under Section 162 or 404 of the Code; or (ii) that is an "excess parachute payment" under Section 280G of the Code. (h) No Amendments. Except as disclosed in Section 4.13(h) of the Company Disclosure Letter, none of the Company, BSL, CMC nor any ERISA Affiliate has any announced plan or legally binding commitment to create any additional Employee Plans with respect to the BSL Senior Living Business or to amend or modify any existing Employee Plan in effect with respect to the BSL Senior Living Business. (i) No Acceleration of Rights or Benefits. Except as disclosed in Section 4.13(i) of the Company Disclosure Letter or as provided by applicable law, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will result in the acceleration of the exercisability of any stock options, the acceleration of the vesting of any restricted stock or any interest in any Pension Plan or Welfare Plan or the creation of rights under any severance, parachute or change of control agreement. (j) No Other Material Liability. No event has occurred in connection with any Employee Plan which would have a Material Adverse Effect on any of the Company, BSL, CMC or any ERISA Affiliate or any such Employee Plan, directly or indirectly under any statute, regulation or governmental order relating to any such Employee Plans. 4.14 Taxes. The Company has filed all Tax returns which are required to have been filed in any jurisdiction with respect to the Company and each of the Subsidiaries, and has paid, before they have become delinquent, all Taxes shown to be due and payable on such returns and, to the knowledge of the Company, all other Taxes and assessments payable by the Company on behalf of itself or any of the Subsidiaries, to the extent the same have become due and payable, except for any Taxes and assessments the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company has set aside on its books reserves to the extent required by, and segregated in accordance with, GAAP. Except as set forth in Section 4.14 of the Company Disclosure Letter, (i) the Company has no knowledge of any proposed material Tax assessment against the Company or any of the Subsidiaries, (ii) to the knowledge of the Company all Tax liabilities of the Company and the Subsidiaries are adequately provided for on the books of the Company and (iii) to the knowledge of the Company all of the Tax returns previously filed by the Company and which, as of the date 26 27 hereof, have not been audited by the applicable Governmental Authority having jurisdiction thereof, were true and correct in all material respects at the time filed by the Company. The Company has not received any notice of any past due or unpaid Tax or assessment which as of the date hereof has not been paid or is being contested in good faith by appropriate proceedings and is evidenced by an appropriate reserve on the Company's books. 4.15. Labor Matters. Except as set forth in Section 4.09(a) of the Company Disclosure Letter, no complaint for sex, age, race or other discrimination claim or any unfair labor practice claim has been brought against the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership which is unresolved as of the date hereof. To the Company's and BSL's knowledge, the Company (with respect to the BSL Senior Living Business), BSL, CMC and each BSL Partnership have complied with all applicable state and federal labor Laws and Orders. Neither the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by any of them. There are and have been no strikes, slowdowns, work stoppages, or lockouts at any of the BSL Facilities (or the BSL Managed Facilities, during the term of the BSL Management Agreement applicable thereto). 4.16. Environmental Matters. Except as disclosed in Section 4.16 of the Company Disclosure Letter or in any of the reports referenced therein, (A) as applicable with respect to the BSL Managed Facilities, to the knowledge of the Company based solely on inquiries made to the applicable administrators, and (B) with respect to the BSL Facilities: (i) The Company (with respect to the BSL Senior Living Business), BSL, CMC and each BSL Partnership are, and at all times during their ownership or operation of the Facilities have been, in compliance in all material respects with all Environmental Laws. (ii) There are no existing Environmental Claims against the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership nor has the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership received any notification of any allegation of any actual, or potential responsibility for, or any inquiry or investigation regarding, any disposal, release or threatened release at any location of any Hazardous Substance generated or transported by any of them. (iii) The Company is not aware of any underground tank or other underground storage receptacle for Hazardous Substances currently located on the BSL Facilities or the BSL Managed Facilities. (iv) There have been no releases (i.e., any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing, or dumping) of Hazardous Substances in quantities exceeding the reportable quantities 27 28 as defined under federal or applicable state law by the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership on, upon or into the BSL Facilities or the BSL Managed Facilities except as allowed by Environmental Laws. In addition, the Company and BSL are not aware (without independent investigation) that there have been any such releases by the Company's or BSL's corporate predecessors, and no releases in quantities exceeding the reportable quantities as defined under federal or state law on, upon, or into any real property in the vicinity of any of the BSL Facilities or BSL Managed Facilities other than those authorized by Environmental Laws which, through soil or ground water contamination, may have come to be located on the BSL Facilities or the BSL Managed Facilities. (v) The Company and BSL are not aware of any PCBs or asbestos located at or on the BSL Facilities or the BSL Managed Facilities. (vi) There are no consent decrees, consent orders, judgments, judicial or administrative orders, agreements with (other than permits) or liens by, any governmental authority or quasi governmental entity relating to any Environmental Law which regulate, or bind the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership. (vii) True and correct copies of all existing Environmental Reports, as well as all other written environmental reports, audits or assessments which have been conducted, either by the Company (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership or any person engaged by any of them for such purpose, at any BSL Facility or BSL Managed Facility or any facility formerly owned, managed or leased by the Company and its Subsidiaries (with respect to the BSL Senior Living Business) or BSL and which are in the possession of the Company, BSL, CMC or any BSL Partnership have been made available to the Purchaser. 4.17. Brokers or Finders. No agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, other than Smith Barney, which has acted as a financial advisor to the Company and which shall be compensated by the Company for its services rendered in connection therewith. 4.18. Insurance. Section 4.18 of the Company Disclosure Letter sets forth the insurance policies covering the operations of the BSL Senior Living Business in effect as of the date hereof, including the policy numbers, terms, identity of the insurers and amounts and nature of coverage. All of such policies (or replacements thereof) are now and will be until Closing in full force and effect, with no premium average. True and correct copies of all such policies and any endorsements thereto have been or will be made available to Purchaser for its review prior to Closing. Neither the Company nor BSL nor CMC nor any BSL Partnership has received any written notice of any actual or proposed cancellation or limitation of coverage or non-coverage under any such policies and the Company (with respect to the BSL Senior Living Business), 28 29 BSL, CMC and each BSL Partnership are in compliance (or are in the process of complying) with all underwriter requirements and recommendations of which any of them has been notified. 4.19. Intellectual Property. (a) Neither the Company nor any of the Subsidiaries has received protection under Federal or state law of any trademarks, trade names, logos, service marks, patents, patent rights, assumed names, trade secrets or copyrights used by them in their business. (b) The Company has implemented, and is actively engaged in, a program designed to monitor the compliance at the corporate office of the Company and its Subsidiaries, including BSL and CMC, with applicable laws governing the licensure of the computer hardware and software used by them in their business. Such a compliance program has not yet been implemented at each of the BSL Facilities and is not anticipated to be implemented at the BSL Managed Facilities. Nothing herein shall be construed as a representation or warranty by the Company that the use by the Company and the Subsidiaries is in full compliance with all applicable hardware and software licensure laws and/or that the trademarks, trade names, logos, service marks, patents, patent rights, assumed names, trade secrets or copyrights used by the Company do not infringe on or violate the rights of any third parties; provided, however, that except with respect to certain copyright violations which have been corrected as of the date hereof, none of the Company, BSL and CMC has received notice of, or has knowledge of, any such infringement or claimed infringement. 4.20. Certain Assets. (a) The Company (with respect to the Related Assets), BSL, CMC and/or the BSL Partnerships have good and marketable title to, or valid fee simple title or leasehold interests in, as applicable, or valid rights under contract to use, all tangible property and assets owned and/or used in the conduct of the BSL Senior Living Business (including all BSL Assets and Related Assets reflected on the Pro Forma Balance Sheet), other than property or assets disposed of since June 30, 1996 in the ordinary course of business. The BSL Assets and Related Assets include all the tangible assets reasonably necessary to the BSL Senior Living Business as is currently conducted. (b) The title of the Company (with respect to the Related Assets), and BSL, CMC and each BSL Partnership with respect to the assets described in clause (a) is free and clear of all Liens other than (i) the Permitted Exceptions and (ii) any Lien which shall be satisfied and released of record as of the Closing Date. All such property and assets are in good working order, condition and repair (ordinary wear and tear excepted) and, adequate and suitable for the purposes for which they are presently being used. (c) Neither the Company nor BSL nor CMC nor any BSL Partnership has received notice of any pending or threatened condemnation or taking by power of eminent domain or 29 30 otherwise of any of the assets described in clause (a) or any notice of any tax or special lien or assessment which would not be paid in full by the Closing Date and for which BSL, CMC or any BSL Partnership would be liable. (d) Except as set forth in Section 4.20(d) of the Company Disclosure Letter, none of the Company, BSL, CMC or the BSL Partnerships has received notice of noncompliance of any of the assets described in clause (a) with applicable building or zoning codes and ordinances. 4.21. No Other Agreements to Sell the Assets or Capital Stock of BSL. Neither the Company nor BSL has any legal obligation, absolute or contingent, to any other person or firm to sell or effect a sale of the Related Assets, the BSL Assets or to sell or effect a sale of the capital stock of BSL or, except as contemplated herein, to effect any merger, consolidation or other reorganization of the Company, BSL, CMC or any BSL Partnership or to enter into any agreement or cause the entering into of an agreement with respect thereto. 4.22. Books and Records. BSL and the Company have made and kept (and given the Purchaser access to) books and records and accounts, which, in reasonable detail, accurately and fairly reflect the activities of the Company and its Subsidiaries (including BSL and CMC) and the BSL Partnerships with respect to the BSL Senior Living Business. Neither the Company (with respect to the BSL Senior Living Business) nor BSL nor CMC nor any BSL Partnership has engaged in any material transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company and its Subsidiaries. 4.23. Americans With Disabilities Act Compliance. The BSL Facilities listed in Section 4.23 of the Company Disclosure Letter are being constructed by or on behalf of BSL and all such construction has been in full compliance with the Americans with Disabilities Act (the "ADA"). None of the Company, BSL, CMC or any BSL Partnership has received any notice to the effect that, or has otherwise been advised that, any of the BSL Facilities or the BSL Managed Facilities is not in compliance with the ADA. 4.24. Undisclosed Liabilities. The Company has not failed to disclose to the Purchaser any liabilities--whether fixed or contingent--actually known to it as of the date hereof and not otherwise disclosed or taken into account in the Company Financial Statements or in the schedules or exhibits hereto or the Company Disclosure Letter. 4.25. Material Misstatements Or Omissions. No representations or warranties by the Company or BSL in this Agreement nor any document, exhibit, statement, certificate, schedule or other information furnished or to be furnished to Purchaser (or its members) pursuant hereto, or in connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained therein not misleading. 30 31 4.26 Development Projects. In connection with the Development Projects, the Company and BSL represent and warrant as follows: (a) A true and correct copy of each construction contract for the Development Projects (including all change orders thereto) has been delivered to Purchaser for its approval and acceptance as to form and content. Neither the Company nor BSL has received or anticipates receiving, from any contractor, any notice of default or notice of intention to suspend or not to commence any work. (b) The Approved Budgets for Development Projects have been prepared by BSL and reflect BSL's estimation of the total costs and expenses to be incurred in connection with the Development Projects after taking into account the requirements of this Agreement. The construction schedule for the Development Projects is realistic and feasible. (c) Neither the Company nor BSL has directly or indirectly conveyed, assigned or otherwise disposed of or transferred (or agreed to do so) any development rights, entitlements, permits or other similar development rights with respect to the Development Projects, including those rights, entitlements, permits, privileges or attributes arising under any zoning or land use ordinance or other Governmental authorization or requirement, except assignments required for the existing financing of the Development Projects, including without limitation sale/leaseback financing. ARTICLE V PURCHASER'S REPRESENTATIONS AND WARRANTIES Purchaser does hereby represent and warrant to the Company and to BSL as follows: 5.01. Organization and Qualification. (a) Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware. Purchaser has, or as of Closing will have, full power and authority under the Delaware Limited Liability Company Act to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties, including the assets and properties to be acquired by it pursuant to the terms of this Agreement (b) Purchaser is or prior to the Closing Date will be duly qualified to do business in, and validly existing and/or in good standing under the laws of, Oregon and each of the states listed in Section 4.01(c) of the Company Disclosure Letter. (c) Purchaser does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity. 31 32 5.02. Authority Relative to this Agreement. Purchaser has full power and authority as a Delaware limited liability company to enter into this Agreement and each other instrument, document and agreement necessary to consummate the transactions contemplated hereby, and to perform its obligations hereunder. The execution, delivery and performance of this Agreement by Purchaser and the consummation by Purchaser of the transactions contemplated hereby have been duly and validly approved by the Executive Committee of Purchaser and no other proceedings on the part of Purchaser as a Delaware limited liability company or its members are necessary to authorize the execution, delivery and performance of this Agreement by Purchaser and the consummation by Purchaser of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser and constitutes a legal, valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.03. Approvals and Consents. Subject to obtaining such consents or making such filings as are referred to in Section 4.04 hereof or in Section 4.04 of the Company Disclosure Letter, the execution and delivery of this Agreement by Purchaser does not, and the performance by Purchaser of its obligations hereunder and the consummation of the transactions contemplated hereby will not: (a) conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or of notice under, any agreement, contract, lease, license, permit, note, instrument or other document to which Purchaser is a party or by which it is bound or to which any of the assets or properties of Purchaser are subject; or (b) violate any Laws or Orders of any Governmental Authority applicable to Purchaser or any of its assets or properties, or the Operating Agreement; or (c) require any consent, approval or action of, or permit from, or filing or registration with or notice to any Governmental Authority or other public or private third party. 5.04. Legal Proceedings. There are no actions, suits, arbitrations or proceedings pending or, to the knowledge of Purchaser, threatened against, relating to or affecting, nor to the knowledge of Purchaser are there any investigations or audits by Governmental Authorities pending or threatened against, relating to or affecting Purchaser or any of its assets and properties. 5.05. Information Supplied. Each document filed by Purchaser with any Governmental Authority in connection with this Agreement and the other transactions contemplated hereby, 32 33 solely to the extent based on information provided by Rockwood Living, Inc., does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 5.06. Brokers or Finders. No agent, broker, investment banker, financial advisor or other firm or person has been engaged by it and is or will be entitled to any broker's or finder's fee or any other commission or similar fee from it in connection with any of the transactions contemplated by this Agreement. ARTICLE VI PRE-CLOSING COVENANTS 6.01. Company. The Company covenants, between the date hereof and the Closing, that: (a) BSL, CMC and the Company shall conduct the BSL Senior Living Business and pursue the Development Projects in the ordinary course consistent with past practices and preserve intact their business organization, keep available the services of their officers and employees in the ordinary course of business and use their commercially reasonable best efforts to maintain satisfactory relationships with suppliers, distributors, customers and others having business relationships with them. (b) None of the Company and its Subsidiaries (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership shall commit or omit to do any act that would cause a breach of any agreement, commitment or covenant of any of them contained in this Agreement or cause the representations and warranties as set forth in this Agreement to become untrue in any material respect as of the Closing Date. (c) Except with respect to the assets which are the subject of the Excluded Assets Transaction, none of the Company, its Subsidiaries, BSL, CMC or any BSL Partnership shall make any material change in the operation of the BSL Senior Living Business or sell or agree to sell all or any portion of the BSL Senior Living Business or the assets thereof (other than sales of machinery, equipment and inventory in the ordinary course of business) or otherwise enter into, terminate, modify or amend any agreements materially affecting any of the Facilities or the operation thereof, without the prior written consent of Purchaser which consent, in the case of terminations, modifications to or amendments of any such agreements shall not be unreasonably withheld. (d) Except with respect to the assets which are the subject of the Excluded Assets Transaction, each of BSL, CMC and the BSL Partnerships shall maintain its assets, and the Company shall maintain the Related Assets, in the same condition as they are in at the date hereof, ordinary wear and tear, insured casualty loss and taking by eminent domain excepted. 33 34 (e) Except in connection with the Development Projects, none of BSL, CMC or any BSL Partnership shall purchase an equity interest in, or the assets of, any corporation, partnership or other entity, or create or permit any Lien on any asset, except for Permitted Exceptions, or create, assume, incur or guarantee any Debt. (f) Except in the ordinary course of business and consistent with past practice, there shall be no increase in the compensation of any of the Personnel or any consultant, nor shall there be any new employment, severance or other agreement with any of the Personnel or any consultant (other than any such agreements executed by the Purchaser). (g) During normal business hours, the Company and BSL will provide Purchaser, its agents and employees (or cause them to be provided) with access on twenty-four (24) hours notice to the books and records of the Company and its Subsidiaries, BSL, CMC and the BSL Partnerships to the extent related to the BSL Senior Living Business, provided they do not unreasonably interfere with the operations of the Company or its Subsidiaries or BSL. (h) None of the Company or its Subsidiaries or BSL, and none of the officers, directors, advisors or others authorized to act on behalf of any of them shall directly initiate or solicit discussions relating to any alternative acquisition proposal or similar transaction including, without limitation, a merger or other business combination involving, to any extent, BSL, CMC or any BSL Partnership or offer to acquire or convey in any manner, directly or indirectly, all or substantially all of the equity interest in, or the voting securities of, the Company, BSL, CMC or any BSL Partnership or the assets of any them (limited in the Company's case to the stock of BSL and the Related Assets), provided, however, that public announcements of the transaction contemplated by this Agreement and responses to inquiries received thereafter shall not be prohibited hereby and that the Company shall not be deemed to be in breach of its obligations hereunder in the event the Board of Directors determines, prior to the approval of the transactions provided for herein and of the Excluded Assets Transaction, the Freedom Village Transaction and the Healthcare Transaction by the shareholders of the Company, in the exercise of its fiduciary duties, that the Company is required to provide information in response to any acquisition or merger proposals or discussions which are initiated by a third party; and provided, further, that nothing herein shall be construed as prohibiting the Company from pursuing the pending negotiations with respect to the Healthcare Transaction or the Excluded Assets Transaction. (i) Except as required for the reincorporation of BSL in the State of Delaware, if the parties agree to do so before Closing as provided herein, neither the Articles of Incorporation nor the Bylaws of any of BSL or CMC nor the BSL Partnership Agreements shall be amended without the prior consent of the Purchaser, which consent shall not be unreasonably withheld. (j) The Company shall promptly submit this Agreement and the transactions contemplated herein, including the Healthcare Transaction and the Excluded Assets Transaction, for approval by, at a meeting of, its shareholders. Subject to its fiduciary duties under applicable 34 35 law, the Board of Directors of the Company has agreed to recommend to its shareholders approval of the Merger and the Related Assets and Liabilities Transaction, the Freedom Village Transaction, the Healthcare Transaction and Excluded Assets Transaction. Subject to the fiduciary duties of the Board of Directors of the Company under applicable law, the Company shall use its reasonable efforts to obtain its shareholders' approval and adoption of this Agreement and the transactions contemplated hereby. Subject to the notice requirements of the Oregon Act, such meeting shall be held as soon as practicable following the execution of this Agreement. (k) None of BSL, CMC and the BSL Partnerships shall declare or pay any dividend or other distribution to the Company or any other person, except in the case of a BSL Partnership, in accordance with the applicable BSL Partnership Agreement. (l) During construction of the Development Projects, the Company and BSL shall maintain or cause to be maintained the following insurance coverages relating to the Development Projects, which will be effective no later than the date of commencement of construction: (1) builder's risk (or equivalent coverage) insurance upon any work done or materials furnished under the construction contracts except excavations, foundations and any other structures not customarily covered by such insurance, such policies to be written in completed value form for 100% of the insurable value of the improvements therefor; (2) workers' compensation and employer's liability insurance covering all Personnel and employees of contractors and subcontractors in amounts required by law; (3) automobile liability insurance covering owned, nonowned and hired automobiles of contractors and subcontractors in an amount not less than $1,000,000 combined single limit; and (4) commercial general liability insurance, including umbrella coverage, with combined coverage in amounts not less than $1,000,000 liability for personal injury for each occurrence and $2,000,000 in the aggregate and $1,000,000 for property damages for each occurrence and $2,000,000 in the aggregate. (m) The Company and BSL shall provide and continuously maintain insurance coverages for the BSL Senior Living Business in such amounts and types as are currently maintained by them. (n) The Company and BSL shall promptly pay all costs, expenses and obligations as and when due in respect of the Development Projects. Further, the Company and BSL shall not amend or modify the Approved Budgets for Development Projects without approval of Purchaser. 35 36 (o) No construction of the Development Projects shall be undertaken except as shown in and in accordance with the construction plans and specifications approved by the Purchaser. (p) The Company shall deliver to Purchaser promptly upon request the names of all persons with whom the Company has contracted or intends to contract for any material work on the Development Projects. No change orders for any of the Development Projects shall be effective without the prior written approval of Purchaser, except any change order that does not (i) extend the completion date, (ii) involve an increase in the approved construction cost of more than $5,000 for any one item or $10,000 in the aggregate, or (iii) adversely affect the exterior of the improvements or otherwise adversely affect any aspect of the aesthetics of the improvements. Notwithstanding the foregoing, all change orders with respect to the DeAnza and Mesa Development Projects shall require Purchaser's approval if the Company wishes to seek reimbursement therefor under the Advance Reimbursement provisions hereof. The Company shall not suffer or permit any breach or default to occur in any of the obligations of the Company or BSL under any construction contract or contracts with the architects or the engineers or any other contract necessary for the continued full ownership, construction, operations, maintenance and enjoyment of the Development Projects, nor shall the Company suffer or permit the same to terminate by reason of any failure of the Company or BSL to meet any requirements thereof whatsoever. (q) All monies sought to be reimbursed to the Company in respect of the Advance Reimbursement shall have been used (to the extent provided in the definition of Advance Reimbursement) to acquire, construct, or develop the Development Projects in accordance with the Approved Budgets for Development Projects, and on Closing Purchaser shall receive lien waivers, releases or subordinations in form and substance reasonably satisfactory to Purchaser in respect of all expenditures included in the Advance Reimbursement for which such lien waivers, releases or subordinations are appropriate. (r) The Company and BSL shall promptly notify Purchaser of the occurrence or existence of any event or circumstance which is or could reasonably be expected to be a breach of the representations, warranties and covenants of the Company and BSL relating to the Development Projects. (t) The Company shall prepare and file all returns for Taxes of the Company and its Subsidiaries for all taxable years and other periods ending on or prior to or including the Closing Date. 6.02. Purchaser. Purchaser covenants that, without the prior written consent of the Company, between the date hereof and the Closing: (a) It shall not commit or omit to do any act that would cause a breach of any agreement, commitment or covenant contained in this Agreement or cause the Purchaser's representations and warranties as set forth in this Agreement to become untrue in any material 36 37 respect as of the Closing Date; and (b) Purchaser shall cause replacement letters of credit to be issued with respect to the letters of credit listed in Paragraph 10 of Schedule 4.12 of the Company Disclosure Letter, on or before the Closing Date. 6.03. Mutual Covenants. Following the execution of this Agreement and until the Closing Date: (a) The Company and Purchaser shall cooperate with each other and use their commercially reasonable efforts to procure all necessary and appropriate consents and approvals, complete and file all necessary and appropriate applications, notifications, filings and certifications, satisfy all requirements prescribed by law for, and all conditions set forth in this Agreement to, the consummation of the transactions contemplated hereby (without conditions adverse to any of the Purchaser, the Company or any of its Subsidiaries, BSL, CMC, the BSL Partnerships and the Surviving Entity). (b) At least 5 days prior to the Closing Date, the Independent Accountants shall review and comment upon a schedule which will be prepared by BSL allocating the Merger Consideration and the Related Assets Consideration among the BSL Assets and the Related Assets, which schedule when completed will be attached to this Agreement as Schedule 12. The Independent Accountants' fees and expenses in connection with preparing such allocation schedule will be paid by the Company pursuant to Section 12.7 hereof. (c) The Company and Purchaser shall deliver such other instruments of title, certificates, consents, endorsements, assignments, assumptions and other documents or instruments, in form reasonably acceptable to the party requesting the same and its counsel, as may be reasonably necessary to carry out and/or to comply with the terms of this Agreement and the transactions contemplated herein; (d) The Company and Purchaser shall confer with each other on a regular basis, report on material operational matters and promptly advise the other orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen would have, a material adverse effect on such party or on BSL, CMC, a BSL Partnership or the Surviving Entity, or which would cause or constitute a material breach of any of the representations, warranties or covenants of such party contained herein; (e) The Company and Purchaser shall promptly provide each other (or its counsel) with copies of all filings made by such party with any state or federal governmental entity in connection with this Agreement or the transactions contemplated hereby. (f) Each of the Company, BSL and Purchaser will use its commercially reasonable efforts to obtain prior to the Closing Date all permits, consents, approvals, authorizations, 37 38 licenses and other orders (and make such filings with any third party or Governmental Authority) (the "Third Party Consents") that each such party is required to obtain (or make) in order to permit (without conditions adverse to any of them or to CMC, any BSL Partnership or the Surviving Entity) the consummation of the Merger and other transactions contemplated by this Agreement (including, but not limited to, such licensure and certification approval in each of the states in which the Facilities are located as may be necessary to enable Purchaser to consummate the Merger) and the consent of lenders, lessors and other third parties (without conditions adverse to any of them or to CMC, any BSL Partnership or the Surviving Entity) to the extent required under any loan documents, lease agreements, management agreements, partnership agreements or other instruments or documents to which the Company or its Subsidiaries (with respect to the BSL Senior Living Business), BSL, CMC or any BSL Partnership is a party. Each of the Company, BSL and Purchaser shall reasonably cooperate with each other (not including incurring any substantial additional liabilities or obligations, other than costs and expenses which another party has agreed to reimburse) in connection with a party's efforts to obtain Third Party Consents which it is required to obtain; provided, however, nothing herein shall be construed as requiring Purchaser or any member thereof to provide a guaranty or other security in order to obtain said Third Party Consents. (h) The parties shall consult with each other prior to the issuance by either party of any press release or any written statement with respect to this Agreement or the transaction contemplated hereby. ARTICLE VII PURCHASER CONDITIONS 7.01. The obligation of Purchaser to consummate the Merger and the Related Assets and Liabilities Transaction is subject to the fulfillment, or to the Purchaser's written waiver thereof, prior to or at the Effective Time, of each of the following conditions: (a) The representations and warranties of the Company and BSL contained in this Agreement or in any certificate or document delivered in connection with this Agreement or the transactions contemplated herein shall be true and correct at and as of the Closing Date as though such representations and warranties were then again made, except for any breaches thereof or inaccuracies therein as would not, individually or in the aggregate, have a Material Adverse Effect. (b) The Company shall have performed and complied in all material respects with all covenants, conditions and agreements contained herein required to be performed or complied with by the Company prior to or at the Closing. (c) Except for such licenses to be issued or transferred by Governmental Authorities as may be required in connection with the operation of the Facilities but which cannot be obtained until after Closing occurs as a result of the applicable rules, procedures and practices 38 39 governing the transfer of facilities such as the Facilities and the re-licensure thereof in the name of the new owner or operator thereof, either (i) no permits, consents, approvals, authorizations, licenses or other orders or filings with any third party or any Governmental Authority shall be necessary in connection with the authorization, execution, delivery and performance by the Company or BSL of all documents in connection with the Merger and the Related Assets and Liabilities Transaction, or (ii) the Company or BSL shall have obtained all such permits, consents, approvals, authorizations, licenses or other orders (without conditions which would materially adversely affect the Purchaser, BSL, CMC, any BSL Partnership or Surviving Entity) or made such filings with such third parties or Governmental Authorities as are necessary to obtain all such permits, consent approvals, authorizations or other orders (without conditions which would materially adversely affect the Purchaser, BSL, CMC, any BSL Partnership or Surviving Entity). (d) The Company shall have delivered (i) a certificate of legal existence, as of a date within ten (10) days of the Closing Date, of each of BSL and CMC by the Secretary of State of Oregon, (ii) a certificate of legal existence or good standing issued by the Secretary of State in the state of formation for each BSL Partnership, and (iii) a certificate of legal existence or good standing for each of BSL and CMC issued by the Secretary of State (or applicable Governmental Authority) in every other state in which either of them is doing business. (e) The Company shall have delivered to Purchaser fully executed (i) in the case of GECC, General Electric Real Estate Credit Corporation ("GERECC") and Claremont Management Company, a document in the form attached as Exhibit C-1 hereto, (ii) in the case of GECC, a document in the form attached as Exhibit C-2, (iii) in the case of Health Care Properties Investors, Inc. documents substantially in the form attached as Exhibit C-3, C-4, and C-5 hereto, (iv) in the case of Nationwide Health Properties, Inc., documents in the form attached as Exhibits C-6, C-7 and C-8 hereto, (v) in the case of the limited partners of Calaroga Terrace Limited Partnership and Carpenters Creek Limited Partnership, ballots in the form attached as Exhibit C-9 and C-10 hereto, respectively, evidencing the affirmative vote and consent of the requisite number of limited partners (as required by the applicable partnership agreement) to the transactions contemplated hereby, (vi) in the case of the members (other than BSL) of the DeAnza Alzheimer's Care Facility, LLC, a document in the form attached as Exhibit C-11 hereto, (vii) in the case of each BSL Partnership which is a landlord under a BSL Lease, documents in the form attached as Exhibits C-12 and C-13 hereto, and (viii) in the case of each owner under a BSL Management Contract, a document substantially in the form attached as Exhibit C-14 hereto provided, however, that if any such owner which is not controlled by one or more Key Employees or affiliates thereof, fails or refuses to execute such a document, the Company, in substitution therefor, shall execute and deliver to Purchaser a statement in form and substance reasonably acceptable to Purchaser with respect to the matters set forth in the form, of such document), and (ix) in the case of GERECC, a document in the form attached as Exhibit C-16 hereto. (f) The Company shall have delivered to Purchaser evidence that the intercompany 39 40 liability of the Company owing to BSL has been paid in full. The Company and BSL represent that the amount of such a liability was $2,198,785.00 as of June 30, 1996. (g) The Company shall have delivered to Purchaser an opinion of counsel to the Company, dated as of the Closing Date, in form and substance satisfactory to the Purchaser, as to customary matters. In rendering such opinion, counsel may rely as they deem advisable as to factual matters, upon certificates and assurances of public officials and officers of the Company and BSL. (h) The Company shall furnish the Purchaser with certificates evidencing compliance with the conditions set forth in this Article 7 as may be reasonably requested by Purchaser. (i) Each of the Company and BSL shall have delivered to the Purchaser a secretary's certificate certifying the truth and completeness of (i) director and stockholder corporate resolutions, fully and properly executed, evidencing authorization of the Company or BSL, and the Agent, as the case may be, to execute, deliver and perform under the terms of this Agreement, including the Other Required Agreements and the exhibits hereto, which resolutions shall be attached to said certificate, and (ii) BSL's articles of incorporation and bylaws, copies of which shall also be attached to said certificate. (j) No order shall be in effect restraining, enjoining or otherwise preventing the Closing. (k) The following agreements shall be executed and delivered to Purchaser by the other parties thereto prior to or at the Closing (collectively, the "Other Required Agreements"): (i) a Lease Agreement in form attached hereto as Exhibit D duly executed by an individual authorized to act on behalf of the Company effective immediately after the closing of the Healthcare Transaction; (ii) a Shared Services Agreement in the form attached hereto as Exhibit E duly executed by an individual authorized to act on behalf of the Company effective immediately after the closing of the Healthcare Transaction; (iii) the Company shall have delivered or caused to be delivered Non-Competition Agreements in the form attached hereto as Exhibit F duly executed by Messrs. A. E. Brim, John Miller and Steven Taylor; and (iv) the Escrow Agreement. (l) General Electric Credit Equities, Inc. shall have released its security interest in BSL's special limited partnership interest in the Carpenter's Creek Partnership, by the execution of the release and related documents in the forms attached hereto as Exhibit C-15 hereto. 40 41 (m) The Freedom Village Transaction and the Excluded Assets Transaction shall be consummated or all of the documents and consideration necessary for the consummation thereof shall have been executed and delivered into escrow and the only condition for the release of said documents and consideration from escrow shall be the confirmation that the Merger and Related Assets and Liabilities Transaction have been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject. (n) Intentionally Omitted. (o) The Operating Agreement shall not have terminated due to any action taken by any of the Members thereof other than Rockwood Living, Inc. (p) There shall not have occurred any event or events constituting or having after June 30, 1996, either individually or in the aggregate, a Material Adverse Effect. (r) Each of A. E. Brim, James M. Williams and K. David McAllister shall have executed and delivered to the Purchaser a Section 7.O1(r) Agreement in the form attached hereto as Exhibit G. ARTICLE VIII COMPANY CONDITIONS 8.01. The obligation of the Company to consummate the Merger and the Related Assets and Liabilities Transaction is subject to the fulfillment, or to the Company's written waiver thereof, prior to or at the Effective Time, of each of the following conditions: (a) The representations and warranties of the Purchaser contained in this Agreement or in any certificate or document delivered in connection with this Agreement or the transactions contemplated herein shall be true in all material respects at and as of the Closing Date as though such representations and warranties were then again made. (b) The Purchaser shall have performed and complied in all material respects with all covenants, conditions and agreements contained herein required to be performed or complied with by the Purchaser prior to or at the Closing. (c) Purchaser shall have caused replacement letters of credit to be issued with respect to the letters of credit listed in Paragraph 10 of Schedule 4.12 of the Company Disclosure Letter. (d) Except for such licenses to be issued or transferred by Governmental Authorities as may be required in connection with the operation of the Facilities but which cannot be obtained until after Closing occurs as a result of the applicable rules, procedures and practices governing the transfer of facilities such as the Facilities and the re-licensure thereof in the name 41 42 of the new owner or operator thereof, either no permits, consents, approvals, authorizations, licenses or other orders or filings with any third party or any governmental authority shall be necessary in connection with the authorization, execution, delivery and performance by the Company or BSL of all documents in connection with the Merger and the Related Assets and Liabilities Transaction, or, except to the extent failure to do so would not have a Material Adverse Effect, the Company or BSL shall have obtained all such permits, consents, approvals, authorizations, licenses and other orders (without conditions which would be materially adverse to the Surviving Entity) or made such filings with such third parties or Governmental Authorities as are necessary to obtain all such permits, consents, approvals, authorizations or other orders (without conditions which would be materially adverse to the Surviving Entity) provided, however, that the foregoing shall not be a condition to the Company's obligation to close in the event the Purchaser waives the Company's inability to secure the same and from and after the Closing indemnifies, defends and holds harmless the Company from and against any Losses which it may incur as a result thereof. (e) Purchaser shall have delivered a certificate of legal existence and/or of good standing as of a date within ten (10) days of the Closing Date issued by the Secretary of State of Delaware and of every other state in which BSL was doing business immediately prior to the Closing. (f) The Operating Agreement shall not have terminated due to any action taken by Rockwood Living, Inc. or its failure to take any action it is obligated to take. (g) Purchaser shall have delivered to the Company an opinion of counsel to Purchaser, dated as of the Closing Date, in form and substance satisfactory to the Company, as to customary matters. In rendering such opinion, counsel may rely as they deem advisable as to factual matters, upon certificates, and assurances of the Purchaser and public officials, and as to matters governed by Oregon law Purchaser's counsel may assume that Oregon law is the same as Illinois law. (h) The Purchaser shall furnish the Company with certificates evidencing compliance with the conditions set forth in this Article 8 as may be reasonably requested by the Company. (i) The Purchaser shall have delivered to the Company a Member's certificate certifying the truth and completeness of (i) resolutions, fully and properly executed, evidencing authorization of the Purchaser to execute, deliver and perform under the terms of this Agreement, including the Other Required Agreements and the exhibits hereto, which resolutions shall be attached to said certificate; and (ii) Purchaser's Certificate of Formation, a copy of which shall also be attached to said certificate. (j) No order shall be in effect restraining, enjoining or otherwise preventing the Closing. 42 43 (k) The Purchaser shall have executed and delivered to the Company the Other Required Agreements. (l) The Freedom Village Transaction shall be consummated or all of the documents and consideration necessary for the consummation thereof shall have been executed and delivered into escrow and the only condition for the release of said documents and consideration from escrow shall be the confirmation that the Merger and Related Assets and Liabilities Transaction have been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject (provided that the Company's or BSL's failure to execute and deliver any documents that they are required to execute and deliver pursuant to the agreements relating to the Freedom Village Transaction shall not excuse the Company's or BSL's performance hereunder). (m) The Healthcare Transaction shall be consummated or all of the documents and consideration necessary for the consummation thereof shall have been executed and delivered into escrow and the only condition for the release of said documents and consideration from escrow shall be the confirmation that the Merger and Related Assets and Liabilities Transaction have been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject (provided that the Company's or BSL's failure to execute and deliver any documents that they are required to execute and deliver pursuant to the agreements relating to the Healthcare Transaction shall not excuse the Company's or BSL's performance hereunder). ARTICLE IX POST-CLOSING COVENANTS 9.01. Certain Gain Recognition. The Company and BSL will recognize, on the Company's consolidated federal income tax return for taxable year 1996, a gain equal to the amount of the goodwill and going concern value of the Company and BSL transferred to the Purchaser as a result of the Merger and the Related Assets and Liabilities Transaction (and each of the Company and BSL shall make the election required by Section 197(f) of the Code). The amount of such goodwill and going concern value will be determined in accordance with the allocation of the purchase price contemplated by Section 6.03(b) hereof. The Company agrees to recognize and pay federal income tax at a 35% rate on the amount of gain specified in this paragraph, notwithstanding any loss, deduction, credit or other allowance or offset to which it may otherwise be entitled under any provision of the Code or the regulations promulgated thereunder. ARTICLE X TERMINATION 10.01. Termination. This Agreement may be terminated by the parties hereto upon the 43 44 following conditions: (a) By mutual consent of the parties; (b) By Purchaser, if the conditions to Closing set forth in Section 7.01 have not been satisfied or waived by the Outside Closing Date. (c) By the Company if the conditions to Closing set forth in Section 8.01 have not been satisfied or waived by the Outside Closing Date. 10.02. Rights on Termination. Each party's right of termination under Section 10.01 of this Agreement is in addition to any other rights it may have under this Agreement or otherwise and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Section 10.01, all further obligations of the parties under this Agreement will terminate, except that the obligations under Section 12.07 of this Agreement and under the Confidentiality Agreement dated May 8, 1996 (the "Confidentiality Agreement") will survive; provided, however, that if this Agreement is terminated by a party because of a breach of this Agreement by the other party then except as provided in Section 10.03 hereof the terminating party's right to pursue all legal remedies will survive such termination unimpaired. 10.03. Default Fee. As security for the obligations of Purchaser hereunder, Rockwood Living, Inc. has deposited with Key Bank of Oregon concurrently with the execution of this Agreement cash or its irrevocable letter of credit in the face amount of $250,000 issued by Bank of America (Illinois), N.A. In the event this Agreement is terminated by the Company as a result of a breach by Purchaser of its obligations under this Agreement or the obligations of the purchaser in the Freedom Village Transaction, the Company's sole remedy in the event of such breach shall be to draw against the Letter of Credit and the amount drawn shall constitute liquidated damages. Purchaser and the Company acknowledge and agree that this Section 10.03 shall be the Company's exclusive remedy with respect to the Merger, the Related Assets and Liability Transaction and all other transactions contemplated by this Agreement in the event such transactions are not consummated. ARTICLE XI INDEMNIFICATION 11.01. By Purchaser. In the event the Closing occurs, then from and after the Closing Purchaser shall defend, indemnify and hold harmless the Company from any Losses arising from or attributable to (i) claims made by third parties against the Company for payment or satisfaction of liabilities or obligations related to the assets, liabilities, operations and business of the BSL Senior Living Business (except to the extent such liabilities or obligations are by the express provisions of Sections 11.02(a)(i), (b) or (c) of this Agreement or provisions of the agreements relating to the Freedom Village Transaction the liability or responsibility of Company), and (ii) the operations of the Surviving Entity after the Closing Date. 44 45 11.02. By Company. In the event the Closing occurs, then from and after the Closing: (a) The Company shall indemnify and hold harmless the Purchaser, CMC and the Surviving Entity against all Losses incurred by any or all of them arising from: (i) liabilities and obligations of the Company and its Subsidiaries, including liabilities and obligations related to the assets, operations, liabilities and business that are retained by, or the liability or responsibility of the Company pursuant to the Healthcare Transaction but specifically excluding liabilities, obligations and Losses (x) which are the responsibility of the Purchaser under Section 11.01 hereof; or (y) which relate to the assets or liabilities which are the subject of the Excluded Assets Transaction (except to the extent such liabilities and obligations are by the express terms of the agreement relating to the Excluded Asset Transaction the liability or responsibility of the Company), and (ii) a breach by the Company or BSL of its representations and warranties, or a breach by the Company of its covenants, set forth in this Agreement. (b) Without limiting in any way the obligations of the Company under Section 11.02(a) hereof, and notwithstanding any limitation contained in any provision of this Agreement (including, without limitation, Section 11.05 hereof), the Company shall indemnify and hold harmless the Purchaser, CMC and the Surviving Entity against: (i) all Income Taxes of the Company and its Subsidiaries, including BSL and CMC, for each taxable year or other period ending on or before or including (for the portion of the taxable year through the close of business on) the Closing Date, including, without limitation, all Taxes that may be or become payable in respect of the matters described in Section 4.14 of the Company's Disclosure Letter; and (ii) all Taxes of the Company and its Subsidiaries, including BSL and CMC, attributable to the transactions contemplated by this Agreement, including the Merger, the Related Assets and Liabilities Transaction, the Healthcare Transaction, the Excluded Assets Transaction, the Freedom Village Transaction and the Limited Partnership Transaction, and also including the federal Income Taxes the Company has agreed to pay as provided in Section 9.01 hereof; and (iii) any breach by the Company of its obligations under Section 6.01(k), Section 9.01 or Section 12.07 hereof; and (iv) any dissenters' rights or other claims by former shareholders of the Company exercising dissenter's rights in connection with the fairness of the consideration paid in the transactions contemplated by this Agreement. (c) Without limiting in any way the obligations of the Company under Section 45 46 11.02(a) hereof, and notwithstanding any limitation contained in any provision of this Agreement, including, without limitation, Section 11.05 hereof, the Company shall pay to the Purchaser any amount previously paid by the Purchaser to the Company as an Advance Reimbursement, which did not qualify or should not have been treated as an Advance Reimbursement and which Purchaser sets forth in a notice of claim relating thereto delivered to the Company within 120 days after the Closing Date. 11.03. Procedures. (a) Third Party Claims--in General. A person seeking indemnification under this Article 11 (the "Indemnified Party") shall give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any third party claim or the commencement of any third party suit, action or proceeding in respect of which indemnity may be sought under this Article 11 (collectively, a "Third Party Claim"), provided, however that delay in giving any such notice shall relieve the Indemnifying Party of its obligations in respect of the Third Party Claim only to the extent the delay results in actual prejudice to the Indemnifying Party. If a Third Party Claim is covered by the indemnity under Section 11.02 above, other than items referred to in Section 11.02(a)(i), (b) or (c) hereof references herein to the Indemnifying Party shall be deemed to refer to the Agent, and Purchaser will give a Loss Notice (as defined below) to the Escrowee and to the Agent in respect of such claim. If a Third Party Claim is covered by the indemnity in Section 11.02(a)(i), (b) or (c) hereof, references to the Indemnifying Party shall be deemed to refer to the Company, and Purchaser will give a Loss Notice (as defined below) to the Company in respect of such claim. The Indemnifying Party shall have the right to participate in and control the defense of any such Third Party Claim, including any suit, action or proceeding relating thereto, at its own expense. If requested by the Indemnifying Party, the Indemnified Party shall reasonably and in good faith cooperate with the Indemnifying Party and its counsel in contesting any claim which the Indemnifying Party elects to contest, including, without limitation, the making of any related counterclaim against the person asserting the Third Party Claim or any cross complaint against any person or providing related statements or testimony. If the Indemnifying Party does not notify the Indemnified Party in writing within twenty (20) business days of the Indemnifying Party's receipt of such Loss Notice of its intent to assume the defense of the Third Party Claim, the Indemnified Party shall be entitled to take control of such Third Party Claim and the defense thereof at the Indemnifying Party's cost and expense (provided that the Indemnifying Party was obligated to indemnify the Indemnified Party hereunder, and further provided that if such Third Party Claim is subject to the limitations described in Paragraph 11.05 hereof, then only to the extent of any funds on deposit in the Escrow Account as provided in Paragraph 11.05), which Third Party Claim shall be diligently prosecuted to a final conclusion or settlement provided, however, that the Indemnified Party may settle such Third Party Claim as it may deem appropriate, in its discretion. The Indemnifying Party shall not be liable under this Article 11 for any settlement effected without its consent of any Third Party Claim or any litigation or proceeding in respect thereof, for which indemnity may be sought hereunder, except for any settlement as to which the Indemnifying Party did not assume the defense and for which the Indemnifying Party was obligated to indemnify hereunder. 46 47 (b) Additional Provisions Applicable to Third Party Claims and Breaches of Representations. Warranties or Covenants subject to Section 11.02(a)(ii). In the event that any circumstances exist or any claim is made or threatened against Purchaser after the Closing Date which the Purchaser believes has resulted or will result in the Purchaser incurring a Loss that is subject to the Company's indemnification obligation in Section 11.02(a)(ii) hereof: (i) Purchaser will promptly deliver to the Escrowee and to the Agent written notice (the "Loss Notice") setting forth a reasonable summary of the nature of the Loss and the facts giving rise thereto and specifying the section of this Agreement to which such Loss relates and the amount thereof and, if the Loss Notice involves a Third Party Claim, a copy of such claim and the Purchaser's reasonable estimate of the amount sought by the third party. (ii) The Agent shall have the right to dispute the Company's responsibility for the Loss on behalf of the Former Holders by the delivery of written notice (the "Dispute Notice") to the Escrowee within twenty (20) business days after Purchaser's delivery of the Loss Notice to the Agent and the Escrowee. If the Agent fails to deliver a Dispute Notice within such twenty (20) business day period, or if the Agent timely delivers a Dispute Notice but does not contest therein all the items included in the Loss Notice, the Escrowee shall be authorized without further action by or approval of any party hereto to disburse from the Escrow Account the amount which is the subject of the Loss Notice (or the portion thereof that is not disputed in the Dispute Notice) to, or as directed by, the Purchaser, except that in the case of a Loss Notice which relates to a Third Party Claim, sufficient funds to cover the Losses which are the subject thereof shall be retained by Escrowee in the Escrow Account until the final resolution thereof however effected, including by the decision of a court of competent jurisdiction (or by decision made upon arbitration or other nonjudicial or quasi-judicial dispute resolution) or by a duly executed settlement agreement, at which time the funds which are the subject of any such Loss Notice(s) shall be disbursed in accordance with the terms of any such order, decision or settlement, as applicable. (iii) In the event the Agent submits a Dispute Notice within the twenty (20) business day period provided for herein and the Agent and Purchaser are unable to resolve their differences within twenty (20) business days after the submission of a Dispute Notice, either the Agent or the Purchaser may submit the matters which are the subject of the Loss Notice to arbitration in accordance with the provisions of Section 11.04 hereof and the Escrowee, the Agent and the Purchaser shall be bound by and shall act in accordance with the determination of the arbitrator. (iv) In the event of a Loss Notice which relates to a Third Party Claim, the matter submitted to arbitration shall be limited to whether the Third Party Claim involves the breach of a representation, warranty or covenant by the Company or BSL hereunder, and the Dispute Notice shall state whether the Agent intends to assume the defense of such Third Party Claim and/or whether the Agent will permit the Purchaser and the Indemnified Parties to retain primary responsibility for the settlement or the defense thereof, subject to the Agent's right, at its 47 48 expense, to retain counsel to monitor, but not to approve, any such defense or settlement negotiations. (v) The submission of a Dispute Notice to arbitration shall not relieve the Agent of its obligation, at its expense, to defend any Third Party Claim in the event it gives notice of its election to do so, unless and until it is determined in such arbitration that the Third Party Claim does not involve a breach of representation, warranty or covenant by the Company hereunder. (vi) In the event the arbitrator determines that a Loss Notice which relates to a Third Party Claim is not the subject of an indemnifiable loss under the terms of this Article 11, the Indemnified Party shall be required to reimburse the Agent for any and all costs and expenses incurred in defending such Third Party Claim until the Indemnified Party assumes the defense thereof, which shall in no event occur later than ten (10) days after such determination is made. In the event the arbitrator determines that a Loss Notice which relates to a Third Party Claim is the subject of an indemnifiable loss under the terms of this Article 11, the Arbitrator shall retain jurisdiction until a final determination of said Third Party Claim by order of a court of competent jurisdiction, by arbitration or other nonjudicial or quasi-judicial proceeding or by a duly executed settlement agreement, at which time the arbitrator shall order disbursement of the funds from the Escrow Account in accordance with such order or settlement. (c) Other Claims. Promptly upon learning of the grounds of a claim for indemnification that is subject to Section 11.02(a)(i), (b) or (c) hereof, the Purchaser shall deliver to the Company a Loss Notice specifying in reasonable detail the grounds and amount of such claim. If such claim is not resolved in sixty (60) days after such delivery, the Purchaser may exercise any rights and pursue any remedies it may have hereunder, at law or otherwise in respect of such claim directly against the Company. 11.04. Arbitration. (a) Any matters which are the subject of the indemnity provisions of this Article 11, other than a Loss Notice and Dispute Notice submitted with respect to the representation set forth in Section 4.O5(b), shall be submitted for resolution to arbitration in Portland, Oregon, or such other location as the Purchaser and the Agent may agree to, under the Commercial Arbitration Rules of the American Arbitration Association to which shall be added the provisions of the Federal Rules of Civil Procedure relating to the Production of Evidence. Such arbitration shall be presided over by a single arbitrator. If the Purchaser and the Agent do not agree on the arbitrator within twenty (20) business days after the delivery by Agent of a Dispute Notice, the arbitrator shall be selected by them from a list of five potential arbitrators provided by the American Arbitration Association. Such list shall be provided within 10 days of the expiration of said twenty (20) business day period (or as soon thereafter as the American Arbitration Association is able to do so), provided that if the American Arbitration Association shall not have provided such list within twenty (20) days after the expiration of said twenty (20) business day period, then 48 49 the arbitrator shall be designated by the presiding judge of the county in which such arbitration is held. The Agent shall delete one name from the list. The Purchaser shall delete one name from the list. This process shall then be repeated in the same order and the last remaining person on the list shall be the arbitrator. This selection process shall take place within the two business days following both parties' receipt of the list of five potential arbitrators. Hearings in such arbitration proceeding shall commence within 20 days of the selection of the arbitrator or as soon thereafter as the arbitrator is available. The arbitrator shall deliver his or her opinion within 20 days after the completion of the arbitration hearings. The arbitrator's decision shall be final and binding upon the parties, and may be entered and enforced in any court of competent jurisdiction by either of the parties. (b) Any Loss Notice and Dispute Notice submitted with respect to the representation set forth in Section 4.O5(b) as to which the parties fail to reach agreement within ten (1O) business days from the date of delivery of the Dispute Notice, will be submitted to the Independent Accountants for determination. The Independent Accountants shall deliver to the Purchaser and the Agent, as promptly as practicable, a written report setting forth their determination of the disputed items, which determination shall be final, conclusive and binding upon the parties, and shall not be subject to appeal to any court or tribunal. (c) Unless otherwise ordered by the arbitrator or the Independent Accountants, the arbitrator's or the independent Accountants' expenses, as applicable, shall be shared equally by the parties. 11.05 Limitation on Claims. (a) Purchaser shall have no right to recover with respect to any Losses until the amount of all such Losses is equal to or greater than $150,000 individually or in the aggregate (the "Loss Threshold"), except in the case of a breach of the representation or warranty set forth in Section 4.05(b), as to which the Purchaser shall be required to suffer or incur a loss in the amount of $150,000 before any such claim can be made (the "Financial Statement Loss Threshold"); provided, however, that to the extent that any Loss subject to the Financial Statement Loss Threshold involves a breach of a representation or warranty contained herein, other than in Section 4.05(b) hereof, such Loss shall be applied in reduction of the Loss Threshold. The Purchaser shall only be entitled to recover Losses suffered or incurred by it in excess of the Loss Threshold or the Financial Statement Loss Threshold, as applicable, and in addition the Purchaser shall not be entitled to be indemnified against any Loss item under Section 11(a)(ii) hereof to the extent that it has previously received payments on account of the identical loss item in respect of any breach of the representation or warranty set forth in Section 4.05(b). Any and all claims for the recovery of losses (other than claims against the Company under Sections 11.02(a)(i), (b)(except as relates to Section 6.01(k) hereof) or (c) hereof) must be brought by Purchaser within one year after the Closing Date, and any claim for recovery of any Loss under Section 11.02(b)(iii) as relates to Section 6.01(k) must be brought by Purchaser within eighteen months after the Closing Date (in each case, the "Limitation Period"), except in 49 50 the case of a breach of the representation and warranty set forth in Section 4.05(b), as to which any claims must be brought within sixty (60) days after the Closing Date and shall be based solely upon an unaudited combined balance sheet of BSL and CMC (giving effect to the transfers contemplated in the Related Assets and Liabilities Transaction and the Excluded Assets Transaction but not taking into account the effect of the Merger of BSL into the Purchaser), dated as of the Closing on the Closing Date, prepared by or at the direction of Purchaser in accordance with GAAP and otherwise on a basis consistent with the Pro Forma Balance Sheet. Any claim against the Company under Section 11.02(a)(i), (b)(except as relates to Section 6.01(k) hereof) or (c) hereof shall not be subject to any limitation set forth in this Section 11.05 and may be brought (except as provided in Section 11.02(c) hereof) at any time prior to the expiration of the statute of limitations applicable with respect to such claim. (b) Except for items referred to in Sections 11.02(a)(i), (b) or (c) hereof, the Purchaser's recourse for any and all Losses pursuant to Section 11.02 shall be limited to the funds on deposit in the Escrow Account, as the Escrow Account may be reduced by payments therefrom pursuant to the provisions of this Agreement (or the agreement relating to the Freedom Village Transaction). It understood and agreed that the Loss Threshold shall not apply to the items referred to in Sections 11.02(a)(i), (b) or (c). (c) Any and all funds remaining in the Escrow Account at the end of the Limitation Period (the "Remaining Escrowed Funds"), including any remaining interest income, shall be released in accordance with the Escrow Agreement; provided, however, that as to any Loss Notices submitted prior to the expiration of the Limitation Period in excess of the Loss Threshold or the Financial Statement Loss Threshold, as applicable, which remain unresolved at the end of the Limitation Period, sufficient funds to cover the Losses which are the subject thereof shall be retained by Escrowee in the Escrow Account until the final resolution thereof however effected, including in accordance with the arbitration procedures set forth in Section 11.04, or, in the case of a Third Party Claim by the decision of a court of competent jurisdiction (or upon arbitration or other nonjudicial or quasi-judicial decision made) or by a duly executed settlement agreement, at which time the funds which are the subject of any such Loss Notice(s) shall be disbursed in accordance with the terms of any such order, decision or settlement, as applicable. 11.06. Further Assurances. The parties agree to execute and deliver any and all documents as may be reasonably requested by the Escrowee to evidence its assumption of the duties and obligations provided for herein. 11.07. Mitigation. Each Indemnified Party will use reasonable efforts to mitigate any Losses for which it may claim indemnification under this Article 11. Further, the indemnities provided by this Article 11 shall apply only to Losses for which the Indemnified Party is not, or is not entitled to be, reimbursed through third party insurance. 11.08. Adjustment of Merger Consideration. Amounts paid for indemnification under this Article 11 shall be deemed to be an adjustment to the Merger Consideration. 50 51 11.09. Income Taxes. The Company acknowledges and agrees that the funds in the Escrow Account shall be deemed for purposes of the tax laws to be the property of the Purchaser and accordingly that Purchaser shall be required to pay Income Taxes on any interest earned thereon. The Company further acknowledges and agrees that the Purchaser shall have the right to withdraw from interest earned on the Escrow Account sufficient funds to pay said Income Taxes and that any interest on the Escrow Account available for disbursement pursuant to the terms hereof shall be reduced by such amount. 11.10. Access to Books and Records. From the Closing Date until the final determination of any matters which are the subject of a Loss Notice and a Dispute Notice, the Agent and his representatives will have such access to the books, records and accounts of the Purchaser and its employees as is relevant to the resolution of such matters. ARTICLE XII MISCELLANEOUS 12.01. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be sent by registered or certified mail, postage prepaid, by overnight delivery, hand delivery or facsimile transmission to the following address: To the Company: Brim, Inc. 305 NE 102nd Avenue Portland, Oregon 97220 Attn: A. E. Brim Phone: 503-256-2070 Fax: 503-254-7619 To BSL: Brim Senior Living, Inc. 305 NE 102nd Avenue Portland, Oregon 97220 Attn: Jim Williams Phone: 503-256-2070 Fax: 503-254-7619 With copy of anything Randi S. Nathanson, Esq. addressed to the Company The Nathanson Group or to BSL to: 1411 Fourth Avenue Suite 905 Seattle, WA 98101 Phone: 206-623-6239 Fax: 206-623-1738 51 52 To Purchaser: Encore Senior Living, LLC 305 NE 102nd Avenue Portland, Oregon 97220 Attn: James Williams Phone: 503-256-2070 Fax: 503-254-7619 With copy to: Rockwood Living, Inc. 200 West Madison Suite 3800 Chicago, Illinois 60606 Attn: John Kevin Poorman Phone: 312-750-8415 Fax: 312-750-8597 With further Latham & Watkins copy to: 5800 Sears Tower Chicago, Illinois 60606 Attn: Stephen S. Bowen Phone: 312-876-7652 Fax: 312-993-9767 To Agent: Lee Zinsli 482 SW Riverbend Drive West Linn, OR 97068 Phone: (503) 656-2718 Fax: (503) 655-8136 Notices shall be effective upon actual receipt or refusal of receipt whether sent by mail, overnight delivery, facsimile transmission or hand delivery. 12.02. Assignment. No party may assign, directly or indirectly, its rights or obligations hereunder without the prior written consent of the other parties. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns, including successors by operation of law pursuant to any merger, consolidation or sale of assets involving either party. 12.03. Sole Agreement. This Agreement may not be amended or modified in any respect whatsoever except by an instrument in writing signed by the parties hereto. This Agreement, the Schedules and Exhibits hereto, the Company Disclosure Letter and the Confidentiality Agreements, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, discussions, writings and agreements between them. 52 53 12.04. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 12.05. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon. 12.06. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties agree and acknowledge that delivery of a signature by facsimile shall constitute execution by such signatory. 12.07. Transactional Expenses. Except as otherwise provided herein, whether or not the transactions contemplated by this Agreement or the Other Required Agreements are consummated, each party (which shall mean the Company in the case of BSL) shall pay its own fees and expenses incident to the negotiation. preparation, execution, delivery and performance hereof and thereof including, without limitation, the fees and expenses of its counsel, accountants and other experts. The Company shall pay all fees and expenses associated with (i) obtaining estoppel certificates, releases, lien waivers and subordinations in connection with the transactions contemplated by this Agreement, (ii) obtaining all permits, consents (including, without limitation, all consents and all other documents described in Section 7.01(e) hereof), approvals, assignments, licenses and orders and other authorizations of any kind, and making such filings with respect to the foregoing with such third parties or Governmental Authorities, as are required in connection with the transactions contemplated hereby, (iii) the investment banking services provided by Smith Barney, (iv) the provision of services to the Company, BSL, CMC or any BSL Partnership by all other persons or entities in connection with the preparation and negotiation of this Agreement and the consummation of the transactions contemplated hereby, and (v) the performance by the Company and BSL of their obligations hereunder. 12.08. Knowledge Defined. To the extent that any of the representations and warranties contained in this Agreement are limited by the phrases "to the knowledge of" or "the Company has no knowledge of" or "Purchaser has no knowledge of" or words or phrases of similar import, the same shall mean, in the case of the Company and BSL, to the actual knowledge of Messrs. A. E. Brim, K. David McAllister, James M. Williams, Bruce A. Schoen, Craig J. Rhea or Rick D. McDaniel after due and diligent inquiry with respect thereto, which inquiry shall include inquiry of the on site administrators of each of the Facilities, and, in the case of Purchaser, to the actual knowledge of Penny Pritzker or John Kevin Poorman, after due and diligent inquiry with respect thereto. 12.09. Severability. If any provision of this Agreement shall for any reason be held to be unlawfully broad as to any application, activity or subject, it shall be construed, by limiting and reducing it, to be enforceable to the extent compatible with applicable law. If, notwithstanding the preceding sentence, any provision contained in this Agreement shall, for any reason, be held to be illegal or unenforceable in any respect, such illegality or unenforceability shall not affect 53 54 any other provision of this Agreement, but this Agreement shall be reasonably construed as if the illegal or unenforceable provision had never been contained herein. 12.10. Further Assurances. The parties hereto shall use their commercially reasonable efforts to do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments or documents as any other party may reasonably request in order to carry out the intent and purposes of this Agreement and the consummation of the transactions contemplated hereby. 12.11. Third Party Beneficiary. Nothing in this Agreement express or implied is intended to and shall not be construed to confer upon or create in any person not a party to this Agreement, any rights, remedies or obligations under or by reason of this Agreement, including without limitation, any right to enforce this Agreement. 12.12. Attorneys' Fees. In the event of a dispute between the parties hereto with respect to the interpretation or enforcement of the terms hereof, the prevailing party in any action resulting therefrom shall be entitled to collect from the other its reasonable costs and attorneys' fees, including its costs and fees on appeal. 12.13. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state or local statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean "including without limitation." 12.14. Disclosure. Anything disclosed in this Agreement or in any of the Exhibits or Schedules attached to this Agreement or the Company Disclosure Letter or any other document delivered pursuant to this Agreement or in the Company Financial Statements shall be deemed to have been disclosed for any and all purposes to which said information relates, and to the extent that such information constitutes an exception to any of covenants, representations or warranties herein such covenants, representations or warranties shall not be deemed to have been breached if such information as and where disclosed is reasonably adequate to give the non-disclosing party fair notice of the exception to the applicable covenants, representations or warranties; provided, however, that nothing set forth in the Approved Business Plan shall be deemed to be an exception to any of the covenants, representations or warranties of the Company or BSL set forth herein. 54 55 12.15. Purchaser Executive Committee Action or Approval Required. All actions required or permitted to be taken by Purchaser under this Agreement shall be valid and effective only if taken or approved by the Executive Committee of Purchaser pursuant to the Operating Agreement. IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth therein. BRIM, INC. By: ------------------------------------ Its: ------------------------------------ BRIM SENIOR LIVING, INC. By: ------------------------------------ Its: ------------------------------------ ENCORE SENIOR LIVING, LLC By: ------------------------------------ Its: ------------------------------------ The Agent hereby executes this Agreement subject to the approval of the shareholders of the Company and, in the event such approval is given, solely for the purpose of agreeing to act as the agent of such shareholders for the limited purposes set forth herein. Subject to obtaining such shareholder approval, Agent hereby represents and warrants that this Agreement has been duly and validly executed and delivered by the Agent and constitutes a legal, valid and binding obligation of the Agent and is enforceable against the Agent in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law), Agent is not making and shall not be responsible for any other representations, warranties or covenants made in this Agreement. Agent acknowledges and agrees to the rights of the Purchaser with respect to the interest earned on the Escrow Account as provided in Section 11.09 hereof. ------------------------------------ Lee Zinsli 55 EX-4.2 5 SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 4.2 ================================================================================ ------------------ Securities Purchase Agreement ------------------ between Brim, Inc. and Leeway & Co. Dated As of December 17, 1996 ================================================================================ 2 TABLE OF CONTENTS
Page 1. Transactions and Definitions.............................................................................1 2. The Securities...........................................................................................1 2.1. Senior Preferred Stock........................................................1 2.2. Junior Preferred Stock........................................................1 2.3. Common Stock..................................................................2 2.4. Warrants......................................................................2 2.5. Investor Securities Defined...................................................2 3. Sale and Purchase of Securities..........................................................................2 3.1. Agreement to Sell and Purchase................................................2 3.2. Closing.......................................................................2 3.3. Subsequent Closing............................................................3 3.4. Use of Proceeds...............................................................3 3.5. Specifically Prohibited Applications of Proceeds..............................3 4. Representations and Warranties...........................................................................3 4.1. Organization, Standing, Subsidiaries, etc.....................................3 4.2. Capitalization................................................................4 4.3. Financial Information.........................................................6 4.4. Related Agreements............................................................7 4.5. Changes in Condition..........................................................9 4.6. Incorporation by Reference....................................................9 4.7. No Legal Obstacle to Agreement................................................9 4.8. ERISA........................................................................10 4.9. Foreign Trade Regulations; Government Regulations............................10 4.10. Litigation...................................................................11 4.11. Solvency.....................................................................11 4.12. Availability for Resale......................................................11 4.13. Disclosure...................................................................11 5. Investment Representations..............................................................................11 5.1. Accredited Investor..........................................................12 5.2. Experience...................................................................12 5.3. Investment...................................................................12 6. Conditions to Purchase..................................................................................12 6.1. Related Agreements...........................................................12
3 6.2. Legal Opinions...............................................................12 6.3. Representations and Warranties; Officers' Certificate........................12 6.4. Origination Fee..............................................................13 6.5. Payment of Transaction Costs.................................................13 6.6. Proper Proceedings...........................................................13 6.7. Legality; Governmental Authorization.........................................13 6.8. General......................................................................13 7.1. Financial Statements.........................................................13 7.2. Transactions with Affiliates.................................................16 7.3. ERISA........................................................................16 7.4. Resale Under Rule 144A.......................................................17 7.5. Confidentiality..............................................................18 7.6. Registration Statements......................................................18 8.1. Charter Amendments...........................................................18 8.2. Related Agreements...........................................................19 8.3. Existence, Etc...............................................................19 8.4. Conduct of Business..........................................................20 8.5. Prohibition of Fundamental Changes...........................................20 8.6. Repurchase...................................................................20 8.7. Restrictions on Indebtedness.................................................20 8.8. Restrictions on Guarantees...................................................20 8.9. Distributions................................................................21 8.10. Board Visitation Rights......................................................21 8.11. Change of Control............................................................21 9. Covenants Applicable While Any Warrants, Warrant Shares or Shares of Common Stock Constituting Investor Securities Are Outstanding.....................................................................22 9.1. Limitations on Issuance of Equity Securities.................................22 9.2. First Refusal Rights.........................................................22 9.3. Board Representation.........................................................25 10. Payment on Investor Securities; Transfer; Replacement...................................................25 10.1. Payment......................................................................25 10.2. Transfer and Exchange of Senior Preferred....................................25 10.3. Transfer and Exchange of Junior Preferred Stock..............................25 10.4. Transfer and Exchange of Common Stock........................................26 10.5. Transfer, Exchange, Exercise and Conversion of Warrants......................26 10.6. Replacement of Lost Securities...............................................26 11. Restrictions on Transfer................................................................................27 11.1. Restrictive Legend...........................................................27 11.2. Notice of Proposed Transfer; Opinions of Counsel.............................27
-ii- 4 11.3. Termination of Restrictions..................................................27 11.4. Special Restriction..........................................................28 12. Definitions.............................................................................................28 12.1. Terms Defined Elsewhere......................................................28 12.2. Action.......................................................................29 12.3. Affiliate....................................................................29 12.5. Applicable Percentage........................................................29 12.7. Business Day.................................................................30 12.8. By-laws......................................................................30 12.9. Capitalized Lease............................................................30 12.10. Charter......................................................................30 12.11. COBRA........................................................................30 12.12. Code.........................................................................30 12.13. Commission...................................................................30 12.14. Consolidated.................................................................30 12.15. Contractual Obligation.......................................................30 12.16. Distribution.................................................................31 12.20. Exchange Act.................................................................31 12.21. Equity Securities............................................................31 12.24. Foreign Trade Regulations....................................................32 12.25. Generally Accepted Accounting Principles.....................................32 12.26. Governmental Authority.......................................................32 12.27. Indebtedness.................................................................32 12.28. Investment...................................................................32 12.29. Legal Requirement............................................................32 12.30. Lien.........................................................................33 12.31. Major Holder.................................................................33 12.32. Material Adverse Change; Material Adverse Effect.............................33 12.33. Members of the Immediate Family..............................................33 12.38. Person.......................................................................34 12.40. Public Sale..................................................................34 12.42. Required Holders.............................................................34 12.44. Securities Act...............................................................34 12.45. Single Employer Plan.........................................................34 12.46. Stockholder..................................................................34 12.47. Subject Entity...............................................................35 12.48. Subsidiary...................................................................35 12.50. Wholly Owned Subsidiary......................................................35 13. Expenses, Indemnity.....................................................................................35 13.1. Expenses.....................................................................35
-iii- 5 13.2. Indemnity....................................................................36 14. Notices.................................................................................................36 15. Survival................................................................................................37 16. Amendments and Waivers..................................................................................37 17. WAIVER OF JURY TRIAL....................................................................................37 18. Service of Process......................................................................................37 19. Applicable Remedies.....................................................................................38 20. Miscellaneous...........................................................................................38
-iv- 6 SCHEDULES AND EXHIBITS Schedule 1 Home Office Payments Exhibit 2.1 Charter of Company Exhibit 2.4 Warrant Exhibit 4.1.3A List of Stockholders before Closing Exhibit 4.1.3B List of Stockholders after Closing Exhibit 4.1.4 Subsidiaries Exhibit 4.1.5 Qualification Exhibit 4.2.1A Other Agreements Related to Equity Securities as of Closing Exhibit 4.2.1B Other Agreements Related to Equity Securities Immediately after Closing Exhibit 4.2.2 Ownership of Subsidiaries Exhibit 4.4 Certain Contractual Obligations Exhibit 4.4.1 Carryco Merger Agreement Exhibit 4.4.2 Credit Agreement Exhibit 4.4.3 Investment Agreement Exhibit 4.4.4 Preferred Stock Purchase Agreement Exhibit 4.4.5 Professional Services Agreement Exhibit 4.4.6 Principal Merger Agreement Exhibit 4.4.7 Shareholders Agreement Exhibit 4.4.8 Registration Rights Agreement Exhibit 4.4.9 Employment Agreements Exhibit 4.5 Changes in Condition Exhibit 7.2 Related Party Transactions Exhibit 8.1 Amendments to Charter Exhibit 8.6 Repurchase Agreements Exhibit 9.1 Issuance of Equity Securities
7 BRIM, INC. 305 N.E, 102nd Avenue Portland, Oregon 97020 Telephone Number: (503) 254-7619 As of December 17, 1996 LEEWAY & CO. C/o State Street Bank and Trust Company Master Trust Division-Q4W P.O. Box 1992 Boston, Massachusetts 02101 Ladies and Gentlemen: In connection with the purchase and sale of securities provided for herein, the undersigned Brim, Inc., a corporation duly organized and validly existing under the laws of the State of Oregon (the "Company"), hereby agrees with you as follows: 1. TRANSACTIONS AND DEFINITIONS. Subject to all of the terms and conditions of this Agreement and in reliance on the representations and warranties set forth or incorporated by reference herein, the Company proposes to issue and sell to you the Investor Securities described herein, and to apply the proceeds therefrom solely as specified in Section 3.3 hereof. Certain terms are used in this Agreement as specifically defined herein. These definitions are set forth or referred to in Section 12 hereof. 2. THE SECURITIES. 2.1. Senior Preferred Stock. The Company has authorized the issuance and sale to you of 20,000 shares of its Series A Senior Preferred Stock, no par value (the "Senior Preferred Stock") with the terms specified in the Company's Charter (the "Certificate") attached hereto as Exhibit 2.1, for an aggregate purchase price of $19,845,531. 2.2. Junior Preferred Stock. The Company has authorized the issuance and sale to you of 3,752 shares its Series B Junior Preferred Stock, no par value (the "Junior Preferred Stock" and together with the Senior Preferred Stock the "Preferred Stock") with the terms specified in the Certificate, for an aggregate purchase price of $3,752,000. 8 2.3. Common Stock. The Company has authorized the issuance and sale to you of 375,200 shares its Common Stock, no par value (the "Common Stock") with the terms specified in the Certificate, for an aggregate purchase price of $375,200. 2.4. Warrants. The Company has authorized the issuance and sale to you of warrants, each in substantially the form of Exhibit 2.4 hereto, for the purchase of an aggregate of 154,469 shares of the Company's Common Stock, no par value, at a per share exercise price of $0.10 (each such warrant, together with any warrant or warrants issued in exchange therefor, being referred to herein as a "Warrant" and collectively as the "Warrants") for an aggregate purchase price of $154,469. 2.5. Investor Securities Defined. The Senior Preferred Stock, the Junior Preferred Stock, the Common Stock and the Warrants being issued to you hereunder, together with (i) any securities issued with respect thereto (whether as a stock dividend or otherwise), upon exercise, conversion or transfer thereof or in exchange therefor, including without limitation the Common Stock issued or issuable upon exercise or conversion of the Warrants (the "Warrant Shares") and (ii) any securities issued with respect to, upon exercise, conversion or transfer of or in exchange for the securities described in the immediately preceding clause (i) or this clause (ii), are collectively referred to herein as "Investor Securities"; provided, however, that any such securities sold in a Public Sale shall cease to be Investor Securities for all purposes hereof. 3. SALE AND PURCHASE OF SECURITIES. 3.1. Agreement to Sell and Purchase. Based on your representations and warranties contained in Section 4 hereof, the Company hereby agrees to issue and sell to you, and, subject to all of the terms and conditions hereof and in reliance on the representations and warranties of the Company set forth or incorporated by reference or otherwise referred to herein, you hereby agree to purchase from the Company, at the Closing, the Senior Preferred Stock, the Junior Preferred Stock, the Common Stock and the Warrants, at the respective purchase prices specified in Sections 2.1 through 2.4. 3.2. Closing. The closing of the purchase and sale of the Investor Securities (the "Closing") shall take place at 10:00 a.m., Chicago time, at the offices of Kirkland & Ellis, on December 17, 1996 or at such other time and place as the Company and you may agree upon (the date on which the Closing occurs being herein referred to as the "Closing Date"). At the Closing, the Company will, unless otherwise requested, deliver to you a single certificate for each of the Senior Preferred Stock, Junior Preferred Stock and Common Stock, in each case evidencing the aggregate number of shares of Senior Preferred Stock, Junior Preferred Stock or Common Stock being issued to you by the Company hereunder, and a single warrant evidencing the aggregate number of Warrants being issued to you by the Company hereunder, each registered in your name, against payment of the purchase price therefor by wire transfer of immediately available funds to a single account of the Company specified by notice from the Company to you not less than three Business Days prior to the Closing Date. -2- 9 3.3. Subsequent Closing. You have agreed that the Company may sell to you an additional 794 shares of Junior Preferred Stock for $1,000 per share and an additional 79,400 shares of Common Stock at $1 per share in accordance with Section 6(d) of the Shareholders Agreement as in effect on the date hereof. If the Company elects to make additional sales to you under this Section 3.3 the Company shall give you written notice of the date of the closing of such additional sales (the "Subsequent Closing") at least ten Business Days prior to the date of such Subsequent Closing (the "Subsequent Closing Date"). At the Subsequent Closing, the Company will, unless otherwise requested, deliver to you a single certificate for each of the Junior Preferred Stock and Common Stock, in each case evidencing the aggregate number of shares of Junior Preferred Stock or Common Stock being issued to you by the Company at the Subsequent Closing, each registered in your name, against payment of the purchase price therefor by wire transfer of immediately available funds to a single account of the Company specified by notice from the Company to you not less than three Business Days prior to the Subsequent Closing Date. 3.4. Use of Proceeds. The Company covenants that it will apply the proceeds of the Investor Securities to be issued and sold by it to you at the Closing to the Redemption and related transactions pursuant to the Related Agreements referred to in Section 4.4 hereof (the "Transactions"). 3.5. Specifically Prohibited Applications of Proceeds. In no event shall the Company, directly or indirectly, apply any part of the proceeds from the issuance and sale hereunder of the Investor Securities to any transaction prohibited by the Foreign Trade Regulations. 4. REPRESENTATIONS AND WARRANTIES. In order to induce you to enter into this Agreement and to purchase the Investor Securities to be purchased by you hereunder, the Company hereby represents and warrants as follows with respect to the Company and its Subsidiaries: 4.1. Organization, Standing, Subsidiaries, etc. 4.1.1. The Company. The Company is a duly organized and validly existing corporation under the laws of the State of Oregon, with all necessary power and authority, corporate and otherwise, to execute, deliver and perform this Agreement and each other Related Agreement to which it is or will be a party, to issue, sell and perform the Investor Securities, and to carry on the business now conducted or currently proposed to be conducted by it. The Company has taken all action, corporate and otherwise, necessary to authorize this Agreement, the other Related Agreements to which it is or will be a party and the issuance of the Investor Securities and to make each such document the legal, valid, binding and enforceable obligation it purports to be, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general principles of equity. This Agreement, each other Related Agreement to which the Company is or will be a party and -3- 10 the Investor Securities have been (or, as applicable, will have been at or prior to the Closing) duly executed and delivered by the Company. 4.1.2. Charter. Attached hereto as Exhibit 2.1 is a correct and complete copy of the Charter of the Company as in effect at the execution hereof and as it will be in effect at the Closing. 4.1.3. Stockholders. Immediately prior to the Closing, the only Stockholders are those listed on Exhibit 4.1.3A hereto. Immediately after the Closing and giving effect to the application of the proceeds of the sale of the Investor Securities to be sold to you at the Closing and the consummation of the Repurchase Agreement, the Redemption, the Carryco Merger Agreement, the Investment Agreement, and the Principal Merger Agreement, the only Stockholders will be those listed on Exhibit 4.1.3B hereto. 4.1.4. Subsidiaries; Investments. The Company has no Subsidiaries other than those listed on Exhibit 4.1.4 hereto. Each Subsidiary is a duly organized and validly existing corporation in good standing under the laws of its state of incorporation, with all necessary power and authority, corporate and otherwise, to execute, deliver and perform each Related Agreement to which it is or will be a party and to carry on the business now conducted at currently proposed to be conducted by it. Each Subsidiary has taken all action, corporate and otherwise, necessary to authorize each Related Agreement to which it is or will be a party, and to make each such document the legal, valid, binding and enforceable obligation it purports to be, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general principles of equity. Each Related Agreement to which any Subsidiary is or will be a party has been (or, as applicable, will have been at or prior to the Closing) duly executed and delivered by such Subsidiary. The Company has no Investment in any Person other than a Subsidiary, other than those described on Exhibit 4.1.4 hereto. 4.1.5. Qualification. Except as set forth on Exhibit 4.1.5 hereto, each of the Company's Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing as such in each jurisdiction in which it is required to be so qualified and is duly authorized, qualified and licensed under all laws, regulations, ordinances or orders of public authorities, or otherwise, to carry on its business in the places and in the manner presently conducted and proposed to be conducted, except for such failures to be so qualified or authorized, qualified and licensed that have not had and are not reasonably expected to have a Material Adverse Effect. 4.2. Capitalization. 4.2.1. Capital Stock of the Company; Options, Etc. The authorized capital stock of the Company immediately prior to the Closing consists of 20,000,000 shares of -4- 11 Common Stock, no par value, 96,000 shares of Series A preferred stock, no par value (the "Series A Preferred Stock"), 750,000 shares of junior redeemable preferred stock, no par value (the "Redeemable Preferred Stock"), 25,000 shares of Senior Preferred Stock, and 50,000 shares of Junior Preferred Stock. As of the date of this Agreement the Company has outstanding 358,000 shares of Common Stock, 96,000 shares of Series A Preferred Stock, 742,033 shares of Redeemable Preferred Stock, and 3,580 shares of Junior Preferred Stock, owned of record as set forth in Exhibit 4.1.3A hereto, all of which have been validly issued and are fully paid and non-assessable. As of the date of this Agreement, no Senior Preferred Stock is outstanding. After giving effect to the Closing and giving effect to the application of the proceeds of the sale of the Investor Securities to be sold to you at the Closing and the consummation of the Repurchase Agreement, the Redemption, the Carryco Merger Agreement, the Investment Agreement, and the Principal Merger Agreement, (x) the authorized capital stock of the Company will consist of 20,000,000 shares of Common Stock, no par value, 96,000 shares of Series A Preferred Stock. 750,000 shares of Redeemable Preferred Stock, 25,000 shares of Senior Preferred Stock and 50,000 shares of Junior Preferred Stock, and (y) the Company will have 3,276,005 shares of common stock outstanding, 20,000 shares of Senior Preferred Stock outstanding, and 28,540 shares of Junior Preferred Stock outstanding, which shall be owned of record as set forth in Exhibit 4.1.3B hereto, all of which will be validly issued, fully paid and non-assessable. No shares of Series A Preferred Stock or Redeemable Preferred Stock will be outstanding immediately after the Closing. When issued and paid for as provided for in this Agreement, the Investor Securities will be subject to no Lien, except restrictions on transfer imposed by this Agreement, the other Related Agreements, and applicable securities laws and Liens, if any, created by you. Except as described in Exhibits 4.2.1A and 4.2.2 hereto, no Subject Entity has outstanding, and except as described in Exhibits 4.2.1B and 4.2.2 hereto, immediately after giving effect to the Closing, no Subject Entity will have outstanding, in each case other than as created by or pursuant to this Agreement or any of the Related Agreements (a) any Equity Securities, or (b) any contractual obligation to repurchase or otherwise acquire or retire any of its Equity Securities. 4.2.2. Subsidiaries. All of the outstanding shares of capital stock of each Subsidiary have been duly and validly authorized and issued and are fully paid. nonassessable and owned beneficially and of record, as set forth in Exhibit 4.2.2 hereto, subject to no Lien or Restriction except Liens securing the Senior Indebtedness, and restrictions on transfer imposed by this Agreement and the other Related Agreements and applicable securities laws, and except as described in Exhibit 4.2.2. 4.2.3. Reservation of Common Stock. The shares of common stock issuable upon exercise at conversion of the Warrants have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company. and such shares, when issued upon such exercise or conversion (as applicable), will be duly and validly issued, fully paid and nonassessable. -5- 12 4.2.4. Issuance of Securities. All outstanding securities of each Subject Entity have been, and all securities of each Subject Entity outstanding on the Closing Date will have been, issued in accordance with all applicable Legal Requirements, including without limitation the Securities Act and state "Blue Sky" laws. 4.3. Financial Information. You have been furnished with, and by your execution hereof acknowledge receipt of, true, complete and correct copies of each of the following: 4.3.1. The consolidated and consolidating balance sheets of the Subject Entities as of December 31, 1995 and the related consolidated and consolidating statements of earnings and consolidated statements of shareholders equity and cash flows for the fiscal year then ended, accompanied by the notes thereto and (with respect to such consolidated statements) the report thereon of KPMG Peat Marwick LLP, and similar financial statements as at the end of and for the preceding fiscal year accompanied by the notes thereto and auditors' report thereon. 4.3.2. The unaudited consolidated and consolidating balance sheets of the Subject Entities as of September 30, 1996 and the related unaudited consolidated and consolidating statement of earnings and consolidated statements of stockholders equity and cash flows for the fiscal quarter and portion of the fiscal year then ended. 4.3.3. Monthly unaudited consolidated and consolidating financial statements of the Subject Entities for internal use for the months of October, 1996 (other than consolidating statements of stockholders equity and cash flow). 4.3.4. The budgeted consolidated and consolidating financial statements of the Subject Entities for the periods ended December 31 of each of 1996 and 1997 (other than consolidating statements of stockholders equity and cash flow). 4.3.5. Pro forma projections of consolidated and consolidating financial results (other than consolidating statements of stockholders equity and cash flow) of the Subject Entities for each of the fiscal years ended December 31, 1998 through 2001. 4.3.6. The pro forma consolidated capitalization of the Subject Entities, as of the Closing Date. The financial statements (including the notes thereto, if any) referred to in Sections 4.3.1 and 4.3.2 were prepared in accordance with generally accepted accounting principles consistently applied (except as to changes described therein and except, in the case of the financial statements described in Section 4.3.2, for the absence of footnotes and normal year end adjustments), and such financial statements and the financial statements referred to in Section 4.3.3 present fairly in all material respects the financial condition of the Persons covered thereby at the respective -6- 13 dates thereof and the results of their operations for the periods covered thereby subject, in the case of interim financial statements, to normal year-end adjustments and the absence of footnotes. The budgeted, projected and pro forma information referred to in Sections 4.3.4, 4.3.5, and 4.3.6 was prepared in good faith, was reasonable to the Company when prepared and continues to be reasonable as of the Closing Date, based upon the assumptions stated therein, it being understood that the actual results of operations of the Subject Entities will depend in part upon the occurrence of the assumptions stated therein, general economic conditions and the normal and ordinary competitive, regulatory and operating risks associated with the business of the Subject Entities, which are not within the control of the Subject Entities and without representation or warranty that such projected performance and financial condition will actually be achieved, it being acknowledged by you that actual results may differ from projected results and such differences may be material. The Company is not aware of any fact which casts doubt on the validity of the pro forma capitalization referred to in Section 4.3.6. After giving effect to the transactions contemplated hereby, the Company does not and will not have any material contingent liabilities which are not referred to in said pro forma capitalization or on the financial statements referred to above or the notes thereto. 4.4. Related Agreements. The Company has furnished or caused to be furnished to you (i) true, correct and complete executed or conformed copies of the documents listed in Sections 4.4.1 through 4.4.9 hereof, inclusive, which have been executed on or prior to the date hereof and of any amendments thereto, modifications thereof or waivers granted thereunder (in the case of oral waivers, a written description thereof), and (ii) true, correct and complete copies of the documents listed in Sections 4.4.1 through 4.4.9 hereof, inclusive, which have not yet been executed, in the exact form in which they will be executed on or prior to, and will be in effect on, the Closing Date. The documents listed in Sections 4.4.1 through 4.4.9 hereof, inclusive, together with this Agreement and the Option Plan, are referred to collectively herein as the "Related Agreements." References to any one of the Related Agreements shall mean such Related Agreement in the form so furnished to you, without regard to any amendment, modification, waiver, change, limitation or termination of such document which is made or otherwise becomes effective after the date hereof, unless such amendment, modification, waiver, change, limitation or termination has been made with your consent, and shall include other documents, exhibits and schedules which are attached thereto or incorporated therein by reference. 4.4.1. Carryco Merger Agreement. The Agreement and Plan of Merger dated December 16, 1996 between the Company and Carryco, Inc., an Oregon corporation (the "Carryco Merger Agreement"). 4.4.2. Credit Agreement. The Credit Agreement dated as of December 17, 1996 (the "Credit Agreement") among the Company, First Union National Bank of North Carolina and the lenders party thereto (the "Lenders") pursuant to which the Lenders shall -7- 14 provide the Company with a term loan in the principal amount of $35,000,000 and a revolving credit loan in the aggregate principal amount of up to $65,000,000 (the "Senior Financing"). 4.4.3. Investment Agreement. The Investment Agreement dated as of November 21, 1996 among the Company, Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR Fund IV") and Principal Hospital Company ("Principal") pursuant to which GTCR Fund IV and its designees shall purchase certain securities of the Company, and certain counterparts thereto (collectively, the "Investment Agreement"). 4.4.4. Preferred Stock Purchase Agreement. The Preferred Stock Purchase Agreement dated as of December 17, 1996 (the "Preferred Stock Repurchase Agreement") between the Company and General Electric Capital Corporation ("GECC"), pursuant to which the Company shall purchase all of the preferred stock of the Company held by GECC (the "GECC Preferred Stock") for an aggregate price of $30,003,106. 4.4.5. Professional Services Agreement. The Professional Services Agreement dated as of December 17, 1996 (the "Professional Services Agreement") among the Company and Golder, Thoma, Cressey, Rauner, Inc. 4.4.6. Principal Merger Agreement. The Plan and Agreement of Merger dated as of December 17, 1996 (the "Principal Merger Agreement") among the Company, Principal and Principal Merger Company, pursuant to which Principal Merger Company shall merge with and into Principal so that, following the merger Principal shall be a wholly-owned subsidiary of the Company, the shareholders of Principal receiving in consideration therefore an aggregate amount of 14,403 shares of Junior Preferred Stock and 1,682,349 shares of the Company's Common Stock. 4.4.7. Shareholders Agreement. The Stockholders Agreement dated as of December 17, 1996 (the "Shareholders Agreement") among the Company, GTCR Fund IV, Leeway & Co., Martin Rash, Richard Gore, AmSouth, First Union, and the Brim Rollover Stockholders. 4.4.8. Registration Agreement. The Registration Agreement dated as of December 17, 1996 (the "Registration Rights Agreement") among the Company, GTCR Fund IV, Leeway & Co., Martin Rash, Richard Gore, AmSouth, First Union, and the Brim Rollover Stockholders. 4.4.9. Senior Management Agreements. The senior management agreements dated December 17, 1996 between the Company, GTCR Fund IV, Leeway & Co., Martin Rash and Richard Gore (the "Employment Agreements"). -8- 15 Except as set forth on Exhibit 4.4 hereto, no Subject Entity is a party to or bound by any Contractual Obligation (i) relating to Indebtedness, or (ii) affecting the Equity Securities of any Subject Entity or the voting thereof, which, in either case, is not a Related Agreement or referred to in one or more of the Related Agreements. 4.5. Changes in Condition. Since December 31, 1995, there has been no Material Adverse Change, and no Subject Entity has entered into any material transaction outside of the ordinary course of business except as described on Exhibit 4.5 hereto or as disclosed elsewhere herein. 4.6. Incorporation by Reference. Each of the representations and warranties made by any Subject Entity in any of the other Related Agreements to which such Subject Entity is a party or in any document delivered pursuant thereto at the Closing or otherwise is incorporated herein by reference with the same force and effect as if fully set forth herein together with the definitions of the defined terms used therein, mutatis mutandis, so that references to the recipient of any such representations and warranties shall be deemed to be references to you. Each such representation and warranty so incorporated herein by reference (other than representations regarding the capitalization of the Company prior to the Closing) is true and correct on the date hereof as if made on and as of the date hereof and is hereby confirmed directly by the Company to you (without regard to any limitation on the survival of representations and warranties). The Company has no reason to believe and does not believe that any of the representations and warranties made by any Person (other than the Subject Entities) in any of the other Related Agreements or in any document delivered pursuant thereto at the Closing or otherwise is not true and correct in all material respects. 4.7. No Legal Obstacle to Agreement. Neither the execution and delivery of this Agreement or any other Related Agreement, nor the consummation of any transaction referred to herein or therein or contemplated hereby or thereby, nor the fulfillment of the terms hereof or thereof or of any agreement or instrument referred to in this Agreement or any other Related Agreement, has constituted or resulted in or will constitute or result in (i) a breach of the provisions of any Contractual Obligation to which any Subject Entity is party or by which it is bound or of its Charter or By-laws, or (ii) assuming the accuracy of your representation, and warranties in Section 5 hereof, a violation of any Legal Requirement applicable to any Subject Entity, or (iii) the creation under any Contractual Obligation of any Lien (other than liens required by the Credit Agreement) upon any of the assets of any Subject Entity. No approval, authorization or other action by any Governmental Authority or any other Person is required to be obtained by any Subject Entity in connection with the execution, delivery and performance of this Agreement or any other Related Agreement or the Investor Securities or the transactions contemplated hereby or thereby, except for such approvals as will have been obtained and shall be in full force and effect as of the Closing Date, and copies of which shall have been furnished to you at or prior to the Closing and except for notice filings required in connection with health care regulatory requirements. -9- 16 4.8. ERISA. 4.8.1. Welfare Plans. Each Welfare Plan is in material compliance with the applicable provisions of ERISA and the Code. Neither the Company nor any Subsidiary of the Company has any contingent, future or other obligations or liabilities under or with respect to any Welfare Plan which provides for the continuation of benefits at the expense of any of them after retirement or other termination of employment (except as required by COBRA or applicable state continuation coverage law, or except to the extent such obligations or liabilities are not reasonably expected to have a Material Adverse Effect). 4.8.2. Pension Plans. Each Pension Plan is in material compliance with the applicable provisions of ERISA and the Code, including without limitation any applicable minimum funding requirements. There have been no reportable events within the meaning of Section 4043 of ERISA that are subject to the 30-day notice to the PBGC as set forth in regulations with respect to any Pension Plan. In the event of the termination of all Pension Plans, neither the Company nor any Subsidiary of the Company would have any liability under Sections 4062, 4063, 4064 of ERISA except to the extent such liability would not be reasonably be expected to have a Material Adverse Effect. As of the most recently prepared actuarial report for each Pension Plan, the accumulated benefit obligations of each Pension Plan does not exceed the fair market value of the assets of such Pension Plan by an amount that is reasonably expected to have a Material Adverse Effect. No Pension Plan is a Multiemployer Plan. 4.8.3. Effect of Transactions. The execution and delivery of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby is not reasonably expected to involve any prohibited transaction within the meaning of ERISA. 4.8.4. Plan Assets. The Company is an Operating Company and none of the underlying assets of the Company or any Subsidiary of the Company are or should reasonably be deemed Plan Assets with respect to you or any Employee Benefit Plan which owns any of the Securities. 4.9. Foreign Trade Regulations; Government Regulations. 4.9.1. Foreign Trade Regulations. Neither the execution and delivery of this Agreement or any other Related Agreement, nor the issuance and sale of the Investor Securities by the Company hereunder and the application of the proceeds thereof, has constituted or resulted in or will constitute or result in the violation of any Foreign Trade Regulation. 4.9.2. Governmental Regulation. Neither the Company nor any corporation controlling the Company or under common control with the Company is subject to -10- 17 regulation under the Public Utility Holding Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce Act or the Federal Power Act, or is subject to any Legal Requirement (other than Legal Requirements applicable to borrowers or issuers of securities generally) which regulates the incurring of Indebtedness by the Company, or any of its Affiliates, for money borrowed or the issuing by any of them of any equity security. No approval or authorization of any governmental authority is required to permit the execution, delivery or performance by the Company of this Agreement or the consummation of any of the transactions contemplated hereby. 4.10. Litigation. There is no Action against any Subject Entity, pending (or, to the knowledge of the Company, threatened), except for such of the foregoing as are not reasonably expected to, individually or in the aggregate, result in any material liability or expense or otherwise result in any Material Adverse Effect. There is no Action, pending (or, to the knowledge of the Company, threatened), which seeks rescission of, seeks to enjoin the consummation of, or questions the validity of, this Agreement or any other Related Agreement or any of the transactions contemplated hereby or thereby. No judgment, decree or order of any Governmental Authority (i) has been issued against any Subject Entity or (ii) to the knowledge of the Company, has been issued against any Person other than a Subject Entity in each case which is reasonably expected to have any Material Adverse Effect. 4.11. Solvency. The Company, both before and after giving effect to this Agreement and the transactions contemplated hereby, is and will be solvent (within the meaning contemplated by Section 548 of Title 11 of the United States Code and any similar state statute which may be applicable), has and will have assets having a fair value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute and matured, and has and will have access to adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection therewith as such debts mature. 4.12. Availability for Resale. The Securities are eligible for resale pursuant to the provisions of Rule 144A. 4.13. Disclosure. Neither this Agreement nor any agreement, certificate, statement or document furnished by or on behalf of the Company in connection herewith, contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein not misleading. There is no fact known to the Company which has had, or in the future is reasonably likely to have (so far as the Company can now foresee), a Material Adverse Effect. 5. INVESTMENT REPRESENTATIONS. You hereby represent and warrant to the Company with respect to the purchase by you of the Investor Securities as follows; provided, however, that nothing contained in this Section 5 shall prevent you from transferring such Investor Securities in compliance with the provisions of Section 11 hereof; and provided, further, that the disposition of your property shall at all times be and remain in your control. -11- 18 5.1. Accredited Investor. You are an "accredited investor" as such term is defined in Rule 501(a) of Regulation D of the Securities Act. 5.2. Experience. You have substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so you are capable of evaluating the merits and risks of your investment in the Company and have the capacity to protect your own interests in making your investment in the Company. 5.3. Investment. You are acquiring the Investor Securities for investment and not with the view to, or for resale in connection with, any distribution thereof. You understand that the Investor Securities to be purchased have not been, and will not be registered under the Securities Act by reason of a specific exemption from the registration provisions of the Securities Act, the availability of which depends upon, among other things, the bona fide nature of your investment intent and the accuracy of your representations as expressed herein. 6. CONDITIONS TO PURCHASE. Your obligation to purchase any of the Investor Securities pursuant to this Agreement is subject to compliance by the Company with its agreements herein contained, and to the satisfaction, simultaneously with or prior to the Closing, of the following conditions, which may be waived by you in the exercise of your sole discretion: 6.1. Related Agreements. The Related Agreements (other than the Option Agreement) shall have been duly authorized, executed and delivered and shall be in full force and effect in the respective forms referred to in Section 4.4 hereof with no term or condition thereof having been amended, modified or waived without your prior written consent. All material covenants and conditions contained in the Related Agreements which are to be performed or complied with at or prior to closing under the Related Agreements shall have been performed, complied with or (subject to the provisions of the immediately preceding sentence) waived prior thereto. The Transactions shall have been consummated by, or shall be consummated contemporaneously with, the Closing. 6.2. Legal Opinions. You shall have received from Kirkland & Ellis and Tonkon, Torp, Galen, Marmaduke & Booth, counsels to the Company, their opinions in form and substance reasonably satisfactory to you. 6.3. Representations and Warranties; Officers' Certificate. The representations and warranties contained in Section 4 hereof shall be true and correct on and as of the Closing with the same force and effect as though made on and as of the Closing; between December 31, 1995 and the Closing there shall have been no Material Adverse Effect as the result of any fire, flood, explosion, accident, drought, strike, lockout, riot, sabotage, confiscation, condemnation or purchase of any property by governmental authority, activities of armed forces or acts of God or the public enemy, legislative or regulatory order or change, judicial decision or any other event or development whether or not related to those enumerated above; and you shall have received -12- 19 on the Closing Date a certificate to these effects signed by the President and the Chief Financial Officer of the Company. 6.4. Origination Fee. You shall have received on or prior to the Closing an origination fee of $100,000 in immediately available funds. 6.5. Payment of Transaction Costs. At the time of the Closing, the Company shall have paid all reasonable fees, expenses, and disbursements incurred by you at or prior to the time of the Closing in connection with the transactions contemplated by this Agreement and of Related Agreements, including, without limitation, the reasonable fees, expenses, and disbursements of your counsel. 6.6. Proper Proceedings. All proper corporate proceedings shall have been taken by the Company to authorize this Agreement and the transactions contemplated hereby. 6.7. Legality; Governmental Authorization. Neither the purchase of the Investor Securities nor the consummation of any of the transactions contemplated hereunder shall be prohibited by any Legal Requirement, or shall subject you to any penalty, special tax, or other onerous condition. All necessary consents, approvals, licenses, permits, orders and authorizations of, and registrations, declarations and filings with, any governmental or administrative agency or any other Person with respect to any of the transactions contemplated by this Agreement or the other Related Agreements shall have been duly obtained or made and shall be in full force and effect. 6.8. General. All instruments and legal and corporate proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to you, and you shall have received copies of all documents, including without limitation records of corporate proceedings and opinions of counsel, which you may have reasonably requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities. Your obligation to purchase Investor Securities pursuant to this Agreement at any Subsequent Closing is subject to compliance by the Company with Section 6(g) of the Shareholders Agreement, and to the satisfaction, simultaneously with or prior to any Subsequent Closing, of the condition contained in 6.5 (with all references to the Closing replaced by a reference to any Subsequent Closing), which may be waived by you in your sole discretion. 7. COVENANTS APPLICABLE WHILE ANY INVESTOR SECURITIES ARE OUTSTANDING. The Company covenants that so long as any of the Investor Securities remains outstanding it will comply with the following provisions: -13- 20 7.1. Financial Statements. Each Subject Entity will maintain a system of accounting in which full, true and correct entries will be made of all dealings and transactions in relation to its business and affairs in accordance with generally accepted accounting principles. 7.1.1. Annual Statements. The Company will furnish to each holder of Investor Securities as soon as available, and in any event within 100 days after the end of each fiscal year of the Company (120 days in the case of fiscal 1996), (i) the consolidated and (if requested) consolidating balance sheet of the Subject Entities as at the end of such fiscal year and the consolidated and (if requested) consolidating statements of income, stockholders' equity and cash flows for such year of the Subject Entities, together (beginning in fiscal 1998) with comparative figures for the immediately preceding fiscal year, accompanied by (i) the reports or certificates of independent certified public accountants of recognized standing, to the effect that such consolidated financial statements have been prepared in accordance with generally accepted accounting principles applied on a basis consistent with prior years (except as to changes described therein with which such accountants concur) and fairly present the financial condition of the Subject Entities at the dates thereof and the results of their operations for the periods covered thereby, (ii) the statement of such accountants that they have caused the provisions of this Agreement to be reviewed and that in the course of their audit of the Company nothing has come to their attention to lead them to believe that any covenant hereunder has been breached, or, if such is not the case, specifying such covenant and the nature of the breach thereof, it being understood that the examination of such accountants cannot be relied upon to give them knowledge of any such breach except as would be disclosed in the course of an audit conducted in accordance with generally accepted auditing standards, and (iii) the certificate of the President or the Chief Financial Officer or Vice President-Controller of the Company that such officer has caused the provisions of this Agreement to be reviewed and have no knowledge of any breach, or if any such officer has such knowledge, specifying such breach, and the nature thereof, and what action the Company has taken, is taking or proposes to take with respect thereto. 7.1.2. Quarterly Reports. The Company will furnish to each holder of Investor Securities as soon as available and, in any event, within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Company, (i) the unaudited consolidated and (if requested) consolidating balance sheet of the Subject Entities as at the end of such quarter and the consolidated and (if requested) consolidating statements of income, consolidated statements of stockholders' equity and cash flows for the fiscal quarter and portion of the fiscal year then ending of the Subject Entities (all in reasonable detail), accompanied by the corresponding figures for the corresponding portions of the previous fiscal year, (ii) a certificate of the President and the Chief Financial Officer of the Company that such statements have been properly prepared in accordance with generally accepted accounting principles consistently applied (except as to changes described therein and except for the absence of footnotes thereto) and fairly present the financial position of the Subject Entities at the dates thereof and the results of their -14- 21 operations for the periods covered thereby, subject only to normal year-end audit adjustments, and (iii) the certificate of the President or the Chief Financial Officer or Vice President-Controller of the Company that such officer has caused the provisions of this Agreement to be reviewed and have no knowledge of any covenant hereunder having been breached, or if such officer has such knowledge, specifying such breach and the nature thereof and what action the Company has taken, is taking or proposes to take with respect thereto. 7.1.3. Monthly Reports. As soon as practicable, and in any event within 45 days after the end of each calendar month of each fiscal year (other than the last month of each fiscal quarter of the Company), the Company will furnish to each Major Holder of each class of Investor Securities then outstanding the operating reports of the Subject Entities as of the end of such month in the form customarily prepared by management for internal use. 7.1.4. Annual Budgets. Not later than 30 days following the end of each fiscal year of the Company (or 60 days following the fiscal year ending December 31, 1997), the Company will furnish to each Major Holder a proposed month by month operating and capital budget for the following fiscal year of the Subject Entities, including projected cash flows. Together with each report furnished pursuant to Section 7.1.1, 7.1.2 or 7.1.3 hereof, the Company shall furnish to each Major Holder a budgetary analysis comparing actual figures by the Subject Entities for such month with the operating and capital budget for that year previously furnished to such Major Holder. 7.1.5. Other Reports. The Company will furnish to each Major Holder (i) promptly after review by the Company's Board of Directors, all management letters furnished to the Company by its auditors, (ii) promptly after the sending or making available for filing of the same, copies of all reports and financial statements which the Company shall send or make available to the holders of its securities, and all registration statements, proxy statements and all reports, if any, which the Company shall file with the Securities and Exchange Commission, and (iii) all material reports, certificates and other written information provided to any lender by any Subject Entity. 7.1.6. Notice of Litigation, Defaults, etc. The Company will promptly, following a senior officer of the Company obtaining knowledge thereof, give each Major Holder written notice of any Action to which any Subject Entity may hereafter become a party which after giving effect to applicable insurance may result in any Material Adverse Change. Promptly upon any senior officer of the Company obtaining knowledge of any covenant hereunder having been breached or of any default or event of default under any agreement relating to indebtedness, the Company will furnish to each Major Holder a notice specifying the nature and period of existence thereof and in the case of a default or event of default what action the Company has taken, is taking or proposes to take with respect thereto. -15- 22 7.1.7. Other Information. From time to time upon request of any Major Holder, the Company will furnish to such Major Holder such other information regarding the business, affairs, operations, prospects, and condition, financial or otherwise, as such Major Holder may reasonably request. Officers and representatives of each Major Holder shall have the right during normal business hours and upon reasonable notice to examine the books and records of the Subject Entities, to make copies, notes and abstracts therefrom, and to make an independent examination of such books and records, for the purpose of verifying the accuracy of the reports delivered by any of them pursuant to this Section 7.1 or otherwise, and of ascertaining compliance with this Agreement. Each holder of Investor Securities understands that some of the information furnished to it pursuant to this Section 7.1 may not be available to the public, and includes confidential information and agrees that it will make all reasonable efforts to keep all information so furnished to it pursuant to this Section 7.1 confidential and will make no use or disclosure to other Persons of such information until such information shall have become public; provided, however, that it shall not be precluded from making disclosure regarding such information (i) to counsel, accountants or other professional advisors, (ii) to any lender to the Company, (iii) in connection with the enforcement of any rights hereunder, (iv) as required by law or applicable regulation or (v) to any parents or corporate affiliates or to any prospective purchaser of Investor Securities (so long as such Person agrees to keep such information confidential in accordance with this Section 7.1). 7.2. Transactions with Affiliates. Except as set forth on Exhibit 7.2, no Subject Entity shall effect any transaction with any Affiliate on a basis less favorable to such Subject Entity than would be the case if such transaction had been effected with a Person which was not an Affiliate; provided, however, that the foregoing shall not apply to transactions among the Company and its Wholly Owned Subsidiaries; and provided, further, except as set forth on Exhibit 7.2, that there shall be no transactions with, or payments or other transfers of property, rights or other value to, holders (other than holders of Investor Securities, the Company and its Wholly Owned Subsidiaries) of any Equity Security of any Subject Entity without the prior written consent of the Required Holders, which shall not be unreasonably withheld. 7.3. ERISA. 7.3.1. Compliance with ERISA, etc. The Company and its Subsidiaries will meet all minimum funding requirements applicable to the Pension Plans imposed by ERISA or the Code and will at all times comply in all material respects with the provisions of ERISA and the Code which are applicable to the Pension Plans and the Welfare Plans, including without limitation, the proscription against causing any Pension Plan to engage in a "prohibited transaction," as described in section 4975 of the Code or section 406 of ERISA, which is not otherwise exempt (or for which an individual exemption is not otherwise issued) except to the extent any failure so to meet or to comply is not reasonably -16- 23 expected to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries will permit any event or condition to exist which would permit any Plan to be terminated under circumstances which would cause the Lien provided for in section 4068 of ERISA to attach to the assets of the Company or any of its Subsidiaries, except to the extent that the imposition of such lien would not have a Material Adverse Effect. The Company will forthwith notify each holder of any Security if there is any reportable event (as defined in section 4043 of ERISA) with respect to any Pension Plan (other than a reportable event for which the 30-day notification to the PBGC has been waived by regulations), or if the Company or any of its Subsidiaries or the Pension Benefit Guaranty Corporation (the "PBGC") takes action to terminate any Single Employer Plan, and the Company will furnish such holders with a copy of any notice of any such reportable event which is required to be filed with the PBGC any notice delivered by the PBGC evidencing its institution of such proceedings or its intent to institute such proceedings, or any notice to the PBGC that such a Pension Plan is to be terminated, as the case may be. The Company will also furnish such holders with copies of any request with respect to any such Single Employer Plan for waiver of the funding standards or extension of the amortization periods under sections 303 and 304 of ERISA or section 412 of the Code, no later than 5 business days after the date on which the request is submitted to the Department of Labor or the Internal Revenue Service, as the case may be. The Company will forthwith notify such holders upon learning of the occurrence of any partial or complete withdrawal from a Multiemployer Plan which is reasonably expected to result in the incurrence of any material withdrawal liability by the Company or any of its Subsidiaries under Subtitle E of Title IV of ERISA. In the event of a withdrawal of the type referred to in the preceding sentence, the Company will also promptly inform such holders of the scope and extent of such liability, to the best of its knowledge. 7.3.2. Operating Company. The Company shall take all actions reasonably necessary to allow it, acting directly or through a Subsidiary or Subsidiaries, to continue to constitute an Operating Company, or otherwise not to cause any of the underlying assets of the Company or any of its Subsidiaries to be deemed Plan Assets with respect to you or any Employee Benefit Plan which owns any of the Investor Securities. 7.4. Resale Under Rule 144A. The Company, at all times during which it is neither subject to the reporting requirement of Section 13 or 15(d) of the Exchange Act, nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act, will provide in written form, upon the written request of any holder of Investor Securities, or a prospective purchaser of securities of the Company from such holder, all information required by Rule 144A(d)(4)(i) of the General Regulations promulgated by the Commission under the Securities Act ("144A Information"). With respect to the holder of Investor Securities, the obligations of the Company under this Section 7.4 shall at all times be contingent upon such holder's obtaining from a prospective purchaser an agreement to take all reasonable precautions to safeguard the 144A Information from disclosure to anyone other than employees, advisors or agents of the prospective purchaser who -17- 24 required access to the 144A Information for the sole purpose of evaluating its purchase of the Securities. 7.5. Confidentiality. Neither the Company nor any Subsidiary shall disclose any information about you, including but not limited to your identity, in any document except where such disclosure is (i) required by law, (ii) required by the Commission or (iii) approved by your prior written consent. If such disclosure is required by law, the Company shall notify you in writing prior to making such disclosure. The Company is authorized to disclose information about you to the Lenders in connection with the Credit Agreement. 7.6. Registration Statements. No Subject Entity will file any registration statement (other than on Form S-8) under the Securities Act covering any offering of debt or equity securities unless it shall first have given each holder of Investor Securities 60 days advance written notice thereof. Each holder of Investor Securities shall have the right, at any time when in its sole and exclusive judgment it is or might be deemed to be a controlling person of any Subject Entity for purposes of the Securities Act, (i) to participate in the preparation of such registration statement and to require the inclusion therein or deletion therefrom of material which in its judgment should be included or deleted, as the case may be, (ii) to retain at its own cost and expense counsel and independent public accountants to assist it in such participation, and (iii) to obtain an opinion from the Company's counsel and a "cold-comfort" letter from the Company's auditors, each in customary form, each addressed to it and covering such matters as it may reasonably specify in connection with such registration statement. Unless a reference to a holder of Investor Securities by name is required by any provision of the Securities Act or the rules and regulations promulgated thereunder, no such registration statement or other document shall refer to such holder by name without the prior written consent of such holder. The indemnity and contribution provisions set forth in Section 6 of the Registration Rights Agreement shall apply mutatis mutandis to any registration statement or other document referred to in this Section 7.6, except that references therein to the holders of Registrable Securities shall be deemed to be references to each holder of Investor Securities. 8. COVENANTS APPLICABLE WHILE ANY SHARES OF PREFERRED STOCK CONSTITUTING INVESTOR SECURITIES ARE OUTSTANDING. 8.1. Charter Amendments. The Charter and By-laws of the Company shall not be amended, modified or supplemented in a manner that poses a material risk of having, directly or indirectly, any Material Adverse Effect or any material adverse effect on any then outstanding Investor Securities or on the rights, remedies or interests of any holder thereof under this Agreement or any of the other Related Agreements. Within 30 days of the Closing, the Company will use its best efforts to replace its certificate with a new Certificate satisfactory to you that has the same substantive provisions (except as set forth in Exhibit 8.1) as the Certificate but that does not permit the issuance of certificates of designation. -18- 25 8.2. Related Agreements. Neither the Company nor any of its Subsidiaries shall agree to any amendment or modification of, or grant any waiver or fail to enforce any of its rights pursuant to, any of the Related Agreements without the prior consent of the Required Holders (which shall not be unreasonably withheld), except for amendments and modifications that do not pose a material risk of having, directly or indirectly, any Material Adverse Effect or any material adverse effect on any then outstanding Investor Securities or on the rights, remedies or interests of any holder thereof under this Agreement or any of the other Related Agreements. 8.3. Existence, Etc. The Company will, and will cause each of its Subsidiaries to: a. preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this Section 8.3 shall prohibit any transaction expressly permitted under Section 8.5 hereof); provided, however, that the Company may permit the dissolution of any of its Subsidiaries (and any such Subsidiary may suffer such dissolution) if, at the time of such dissolution, such Subsidiary has no assets, engages in no business and otherwise has no activities other than activities related to the maintenance of its corporate existence in good standing; b. comply with the requirements of all applicable Legal Requirements, as in effect from time to time, if failure to comply with such requirements could reasonably be expected to have a Material Adverse Effect; c. pay and discharge all taxes, assessments and governmental charges or levies in excess of $500,000 imposed on it or on its income or profits or on any of its assets or property prior to the date on which the penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; d. subject to Section 6.15 of the Credit Agreement, maintain all of its assets and properties used or useful in its business in good working order and condition, ordinary wear and tear excepted, except to the extent the failure to maintain the same would not have a Material Adverse Effect; and e. keep adequate records and books of accounts, in which complete entries will be made in accordance with GAAP. Without limiting the generality of the foregoing, the Company will, and will cause each of its Subsidiaries to: (i) do all things necessary to maintain its corporate existence separate and apart from its Affiliates, including, without limitation holding regular meetings of its shareholders and Board of Directors and maintaining appropriate corporate books and record (including current -19- 26 minute books); (ii) not suffer any limitation on the authority of its own officers and directors to conduct its business and affairs in accordance with their independent business judgment other than pursuant to Article VI of the Credit Agreement, or authorize or suffer any Person other than its own officers to conduct its business and affairs in accordance with the independent judgment, or authorize or suffer any Person other than its own officers and directors to act on its behalf with respect to matters (other than matters customarily delegated to others under power of attorney) for which a corporation's own officers and directors would customarily be responsible; and (iii) (A) maintain or cause to be maintained by an agent or employee under its physical control and possession all its books and records, (B) account for and manage all of its liabilities separately from those of any other Person, including, without limitation, payment by it of all payroll and other administrative expenses and taxes from its own assets, (C) segregate and identify separately all of its assets from those of any other Person and (D) maintain employees, and pay its employees, officers and agents for services performed on its behalf. 8.4. Conduct of Business. Each Subject Entity will engage only in the business conducted by it on the date hereof, or in businesses that are related to such business. 8.5. Prohibition of Fundamental Changes. Except as specifically contemplated by this Agreement and by the Related Agreements and as permitted by Section 6.1 of the Credit Agreement, the Company will not, nor will it permit any of its Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself or suffer any liquidation or dissolution. The Company will not, nor will it permit any of its Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or substantially all, on a consolidated basis, of the business, property or assets of the Company and its Subsidiaries. 8.6. Repurchase. The Company shall not, nor shall it subject itself to any obligation to, repurchase or otherwise acquire or retire any of its equity interests or any securities convertible into or exchangeable for any of its equity interests except as contemplated by Exhibit 8.6 hereto and except for rights existing under the other Related Agreements or the Certificate. 8.7. Restrictions on Indebtedness. No Subject Entity will create, incur or otherwise become or remain liable with respect to any Indebtedness except the following: 8.7.1. The Senior Financing. 8.7.2. Indebtedness permitted under Section 6.2 of the Credit Agreement. 8.7.3. Indebtedness of any Subsidiary of the Company to the Company. 8.8. Restrictions on Guarantees. The Subject Entities will not become or remain liable with respect to any Guarantee of any obligation of any other Person except the following: -20- 27 8.8.1. Guarantees required under the Credit Agreement. 8.8.2. Guarantees permitted by Section 6.3 of the Credit Agreement. 8.8.3. Guarantees by the Company of the obligations of Subsidiaries of the Company. 8.9. Distributions. Neither the Company nor any of its Subsidiaries shall make any distribution with respect to the Company's common stock. Neither the Company nor any of its Subsidiaries shall make any cash Distribution with respect to the Junior Preferred Stock while there are any shares of Senior Preferred Stock outstanding. 8.10. Board Visitation Rights. The Company will give to each Major Holder of Senior Preferred Stock and Junior Preferred Stock that does not already have a Director Designee: (a) reasonable prior written notice of the time, place and subject matter of any proposed meeting of its board of directors, and (b) reasonable prior written notice of the date and subject matter of any proposed action by written consent of its board of directors. Each such notice shall include true and complete copies of all documents furnished to any director in connection with such meeting or consent. Each such Major Holder will be entitled to send one Person to attend any such meeting, or if a meeting is held by telephone conference to have one Person participate therein but no more than two representatives of the Major Holders may attend or participate in any such meeting), but the foregoing right of attendance or participation shall not in and of itself include the right to vote on matters presented to the board of directors. 8.11. Change of Control. 8.11.1. Upon the occurrence of a Change of Control of the Company, you shall have the right to require the Company to redeem the Senior Preferred Stock at a price equal to the price payable by the Company upon an Optional Redemption of Senior Preferred Stock, as set forth in the Certificate. 8.11.2. Upon the occurrence of a Change of Control of the Company, you shall have the right to require the Company to redeem the Junior Preferred Stock at a price equal to the price payable by the Company upon a Mandatory Redemption of Junior Preferred Stock, as set forth in the Certificate. 8.11.3. A "Change of Control" shall be deemed to occur if the Company sells substantially all of its assets or if the Equity Owners as a group, after giving effect to the Closing, cease to own, directly or indirectly (a) at least 40% of the Equity Securities of the Company, if the Company's Equity Securities are then publicly traded, or (b) at least 50% of the Equity Securities of the Company, if the Company's Equity Securities are not publicly traded. -21- 28 9. COVENANTS APPLICABLE WHILE ANY WARRANTS, WARRANT SHARES OR SHARES OF COMMON STOCK CONSTITUTING INVESTOR SECURITIES ARE OUTSTANDING. 9.1. Limitations on Issuance of Equity Securities. The Company will not issue any of its Equity Securities to any Person; provided, however, that the Company may (i) issue Equity Securities in accordance with this Agreement, the Investment Agreement, Section 6 of the Shareholder Agreement, the Option Plan, and, as set forth on Exhibit 9.1, and (ii) issue Equity Securities upon conversion of securities issued pursuant to clause (i) above, and (iii) subject to compliance with the provisions of Section 9.2 hereof (if applicable), issue shares of Common Stock to persons not Affiliates of the Company for consideration not less than the fair market value of such shares. Except as set forth on Exhibit 4.2.2, all of the outstanding Equity Securities of each Subsidiary of the Company shall at all times be owned, beneficially and of record, by the Company, free and clear of all Liens, except for Liens permitted hereunder. 9.2. First Refusal Rights. The Company shall not issue or sell any of its Equity Securities, or enter into any Contractual Obligation providing for the issuance (contingent or otherwise) of, any of its Equity Securities (each an "Issuance" of "Subject Securities"), except in compliance with the following provisions of this Section 9.2. 9.2.1. Right of Participation. 9.2.1.1. Not fewer than thirty days prior to the consummation of the Issuance, a notice (the "Preemption Notice") shall be furnished by the Company to each holder of Investor Securities. The Preemption Notice shall include: (a) The principal terms of the proposed Issuance, including without limitation the amount and kind of Subject Securities to be included in the Issuance, the maximum and minimum (which shall be not less than 90% of such maximum) price per unit of the Subject Securities and the name and address of the Persons to whom the Subject Securities will be Issued (collectively, the "Proposed Subscriber"); and (b) An offer by the Company to issue, at the option of such holder of Investor Securities, to such holder of Investor Securities, up to such holder's Applicable Percentage of the Subject Securities which would be otherwise issued in the Issuance, on the same terms and conditions as the Subject Securities are purchased by the Proposed Subscriber. 9.2.1.2. If a holder of Investor Securities desires to accept the offer contained in the Preemption Notice, it shall send, within twenty days after the receipt of the Preemption Notice, a written commitment to the Company specifying the amount of Subject Securities (not in any event to exceed such holder's -22- 29 Applicable Percentage of the Subject Securities to be included in the Issuance) which such holder desires to be issued. If any holder of Investor Securities has not so accepted such offer, such holder shall be deemed to have waived (for itself and any transferee or assignee of its Investor Securities) all of its rights with respect to this Issuance, and the Company shall thereafter be free to issue the Subject Securities to the Proposed Subscriber, at a price no less than 95% of the minimum price set forth in the Preemption Notice and on otherwise no more favorable terms in any material respect than as set forth in the Preemption Notice, without any further obligation to such holder. If, prior to consummation, the terms of such proposed Issuance shall change with the result that the price shall be less than 95% of the minimum price set forth in the Preemption Notice, it shall be necessary for a separate Preemption Notice to have been furnished, and the terms and provisions of this Section 9.2 separately complied with, in order to consummate such Issuance pursuant to this Section 9.2. The acceptance of such holder shall be irrevocable except as hereinafter provided, and such holder shall be bound and obligated to acquire in the Issuance on the same terms and conditions, with respect to each unit of Subject Securities issues in the Issuance, such amount of Subject Securities as such holder shall have specified in its written commitment. If at the end of the ninetieth (90th) day following the date of the receipt of the Preemption Notice the Company has not completed the Issuance, any holder of Investor Securities who has accepted the offer in a Preemption Notice shall be released from its obligations under the written commitment, the Preemption Notice shall be null and void, and it shall be necessary for a separate Preemption Notice to have been furnished, and the terms and provisions of this Section 9.2 separately complied with, in order to consummate such Issuance pursuant to this Section 9.2. 9.2.1.3. The Company may condition the participation of any holder of Investor Securities in an Issuance upon the purchase by it of any securities (including without limitation debt securities) other than Subject Securities ("Other Securities") in the event that the participation of the Proposed Subscriber in such Issuance is so conditioned. In such case, each holder of Investor Securities shall acquire in the Issuance, together with the Subject Securities to be acquired by it, Other Securities in the same proportion to the Subject Securities to be acquired by it as Other Securities are acquired by the Proposed Subscriber in proportion to the Subject Securities acquired in the Issuance by the Proposed Subscriber, on the same terms and conditions, as to each unit of Subject Securities and Other Securities issued to the Proposed Subscriber, as the Proposed Subscriber shall be issued units of Subject Securities and Other Securities. 9.2.1.4. Each holder of Investor Securities and its Affiliates shall take or -23- 30 cause to be taken all such reasonable actions as may be necessary or reasonably desirable in order expeditiously to consummate each Issuance pursuant to this Section 9.2 and any related transactions, including, without limitation, executing, acknowledging and delivering consents, assignments, waivers and other documents or instruments with governmental authorities; and otherwise cooperating with the Company; provided, however, that no holder of Investor Securities or any Affiliate thereof shall be required to agree to any amendment or modification of, or waiver under, or other change to, this Agreement, the Investor Securities or any other Related Agreement. 9.2.1.5. All costs and expenses incurred by any holder of Investor Securities or the Company in connection with any proposed Issuance of Subject Securities (whether or nor consummated), including without limitation all attorney's fees and charges, all accounting fees and charges and all finders, brokerage or investment banking fees, charges or commissions, shall be paid by the Company; provided, however, that if a holder of Investor Securities or any of its Affiliates retains separate legal counsel or other advisors in connection with such proposed Issuance, the fees and expenses of such separate attorneys or other advisors shall be borne by such holder. 9.2.1.6. The closing of an Issuance pursuant to Section 9.2 shall take place at such time and place as the Company shall specify by notice to each participating holder of Investor Securities. At the closing of any Issuance under this Section 9.2, such holders of Investor Securities shall be delivered the notes, certificates or other instruments evidencing the Subject Securities (and, if applicable, Other Securities) to be issued to it, registered in the name of such holder of its designated nominee, free and clear of any Liens, with any transfer tax stamps affixed, against delivery by such holders of the applicable consideration. 9.2.2. Excluded Transactions. The preceding provisions of this Section 9.2 shall not restrict: (a) Any Issuance of Equity Securities pursuant to clause (i) of Section 9.1 hereto; (b) Any Issuance of Common Stock upon the exercise or conversion of any Investor Securities or any Equity Securities outstanding on the date hereof or issued after the date hereof in compliance with the provisions of this Section 9.2; (c) Any Issuance of Common Stock pursuant to a public offering registered under the Securities Act, other than shares issued pursuant to an employee plan registered on Form S-8 or any similar plan or form. -24- 31 9.2.3. Termination. The foregoing provisions of this Section 9 shall terminate immediately following the closing of a public offering registered under the Securities Act (other than an offering of shares issued pursuant to an employee plan registered on Form S-8 or any similar plan or form) immediately after giving effect to which Common Stock not held by Affiliates of the Company, which is freely tradeable and the sale of which is not in any way subject to Rule 144 (including without limitation Rule 144(k)) under the Securities Act, having an aggregate public market value of not less than $30,000,000 is outstanding (a "Qualifying Public Offering"). 9.3. Board Representation. The Company shall use its best efforts to cause the holders of Common Stock, Warrants, and Warrant Shares constituting Investor Securities (the "Common Holders") to have the collective right to elect one member (their "Director Designee") to the Board of Directors of the Company. 10. PAYMENT ON INVESTOR SECURITIES; TRANSFER; REPLACEMENT. 10.1. Payment. All payments made in respect of the Investor Securities held by you shall be made in federal or other immediately available funds in lawful money of the United States for credit, not later than 2:00 p.m., Eastern Standard Time, to you at your account set forth on Schedule I hereto accompanied by sufficient information to identify the source and application thereof or by such other method or at such other address as a holder of Investor Securities shall have from time to time given timely notice of to the Company. 10.2. Transfer and Exchange of Senior Preferred Stock. The Company shall keep at its principal office a register in which shall be entered the names and addresses of the registered holders of shares of Senior Preferred Stock issued by it and particulars of the respective shares of Senior Preferred Stock held by them and of all transfers of such shares. Upon surrender at such office of any certificate representing shares of Senior Preferred Stock for registration of exchange or (subject to compliance with the applicable provisions of Section 11), transfer, the Company shall issue, at its expense, one or more new certificates, in such denomination or denominations as may be requested, for shares of such Senior Preferred Stock and registered as such holder may request. Any certificate representing shares of Senior Preferred Stock surrendered for registration of transfer shall be duly endorsed, or accompanied by a written instrument of transfer duly executed by the holder of such certificate or his attorney duly authorized in writing. 10.3. Transfer and Exchange of Junior Preferred Stock. The Company shall keep at its principal office a register in which shall be entered the names and addresses of the registered holders of shares of Junior Preferred Stock issued by it and particulars of the respective shares of Junior Preferred Stock held by them and of all transfers of such shares. Upon surrender at such office of any certificate representing shares of Junior Preferred Stock for registration of exchange or (subject to compliance with the applicable provisions of Section 11), transfer, the -25- 32 Company shall issue, at its expense, one or more new certificates, in such denomination or denominations as may be requested, for shares of such Junior Preferred Stock and registered as such holder may request. Any certificate representing shares of Junior Preferred Stock surrendered for registration of transfer shall be duly endorsed, or accompanied by a written instrument of transfer duly executed by the holder of such certificate or his attorney duly authorized in writing. 10.4. Transfer and Exchange of Common Stock. The Company shall keep at its principal office a register in which shall be entered the names and addresses of the registered holders of shares of Common Stock issued by it and particulars of the respective shares of Common Stock held by them and of all transfers of such shares. Upon surrender at such office of any certificate representing shares of Common Stock for registration of exchange or (subject to compliance with the applicable provisions of Section 11), transfer, the Company shall issue, at its expense, one or more new certificates, in such denomination or denominations as may be requested, for shares of such Common Stock and registered as such holder may request. Any certificate representing shares of Common Stock surrendered for registration of transfer shall be duly endorsed, or accompanied by a written instrument of transfer duly executed by the holder of such certificate or his attorney duly authorized in writing. 10.5. Transfer, Exchange, Exercise and Conversion of Warrants. The Company shall keep at its principal office a register in which shall be entered the names and addresses of the holders of the Warrants and particulars of the Warrants held by them and of all transfers, exchanges, conversions and redemptions of Warrants. Upon surrender at such office or such other place as shall be duly specified by the company of any Warrant for redemption, conversion, exercise, exchange or (subject to compliance with the applicable provisions of this Agreement, including without limitation the conditions set forth in Section 11 hereof) transfer, the Company shall issue at its expense one or more new Warrants in such denomination or denominations as may be requested, and registered as such holder may request. Any Warrant surrendered for registration of transfer shall be duly endorsed, or accompanied by a written instrument of transfer duly executed by the holder of such certificate or his attorney duly authorized in writing. The Company will pay shipping and insurance charges, from and to each holder's principal office, upon any transfer, exchange, conversion or redemption provided for in this Section 10.5. 10.6. Replacement of Lost Securities. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of a security and, in the case of any such loss, theft or destruction, upon delivery of an indemnity bond in such reasonable amount as the Company may determine (or, in the case of a security held by you or another institutional holder or by the nominee of you or such other institutional holder, of an unsecured indemnity agreement from you or such other holder reasonably satisfactory to the Company) or, in the case of any such mutilation, upon the surrender of the security for cancellation to the Company at its principal office, the Company at its expense will execute and deliver or will cause to be executed and delivered in lieu thereof a new security of like tenor. Any security in lieu of which any such new security has been so executed and delivered or caused to be executed and delivered by the -26- 33 Company shall not be deemed to be an outstanding security for any purpose. 11. RESTRICTIONS ON TRANSFER. The Investor Securities shall be transferable only upon satisfaction of the applicable conditions specified in this Section 11 11.1. Restrictive Legend. Except as otherwise permitted by Section 11.3 hereof, each Warrant shall bear a legend in substantially the form of the legend set forth at the beginning of Exhibit 2.2 hereto, and each certificate representing Warrant Shares, or shares of Senior Preferred Stock, Junior Preferred Stock or Common Stock shall bear a legend in substantially the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or under the securities laws of any state, and may not be sold, or otherwise transferred, in the absence of such registration or an exemption therefrom under such Act and under any such applicable state laws. Furthermore, such shares may be sold or otherwise transferred only in compliance with the conditions specified in the Securities Purchase Agreement dated as of December __, 1996 among the issuer hereof and the other parties thereto. Complete and correct copies of such Agreement (including the Exhibits thereto) are available for inspection at the principal office of the issuer hereof and will be furnished without charge to the holder of such shares upon written request." 11.2. Notice of Proposed Transfer; Opinions of Counsel. Prior to any transfer of any Investor Securities other than pursuant to an effective registration statement under the Securities Act. the holder thereof will give not less than three Business Days' prior written notice to the Company of such holder's intention to effect such transfer, describing in reasonable detail the manner of the proposed transfer. No holder of Investor Securities shall transfer any Investor Securities other than pursuant to an effective registration statement under the Securities Act until (i) such holder delivers to the Company an opinion of Ropes & Gray or other counsel reasonably acceptable to the Company addressed to the Company to the effect that the proposed transfer may be effected without registration of such Investor Securities under the Securities Act or applicable state securities laws, and (ii) the transferee agrees in writing to be bound by all of the terms of this Agreement and the Investor Securities to be transferred, and thereupon such holder shall be entitled, within 30 days thereafter, to transfer such Investor Securities in accordance with the terms of this Agreement and the notice delivered by such holder to the Company. 11.3. Termination of Restrictions. The restrictions imposed by this Section 11 upon the transferability of Investor Securities shall cease and terminate as to any particular Investor Securities and any securities issued in exchange therefor or upon transfer thereof (i) when, (in the case of Sections 11.1 and 11.2 hereof) in the written opinion (addressed to the Company) of Ropes & Gray or other counsel reasonably acceptable to the Company, such restrictions are no longer required in order to assure compliance with the Securities Act, or (ii) when such Investor Securities are being or have been sold pursuant to a Public Sale. Whenever any of such restrictions shall cease and terminate as to any Investor Securities, the holder thereof shall be -27- 34 entitled to receive, without expense, from the Company, new certificates not bearing that part of the legend specified in Section 11.1 hereof that is no longer applicable. 11.4. Special Restriction. No Investor Security shall be transferred (other than in a Public Sale) to any Person unless such Person is a Financial Institution. Investor Securities shall be transferable in blocks of no fewer than 10% of the number of shares of such Investor Securities issued at the Closing. In the case of the Warrants, the restriction of the preceding sentence shall be applied based on the number of shares for which such Warrant could be exercised. 12. DEFINITIONS. For purposes of this Agreement: 12.1 Terms Defined Elsewhere. The following terms defined elsewhere in this Agreement in the Sections set forth below shall have the respective meanings therein defined:
Term Definition "Carryco Merger Agreement" Section 4.4.1 "Certificate" Section 2.1 "Change of Control" Section 8.11.3 "Closing" Section 3.2 "Closing Date" Section 3.2 "Common Holders" Section 9.3 "Common Stock" Section 2.3 "Company" Preamble "Credit Agreement" Section 4.4.2 "Director Designee" Section 9.3 "Employment Agreements" Section 4.4.9 "GECC" Section 4.4.4 "GECC Preferred Stock" Section 4.4.4 "GTCR Fund IV" Section 4.4.3 "Investment Agreement" Section 4.4.3 "Investor Securities" Section 2.5 "Issuance" Section 9.2 "Junior Preferred Stock" Section 2.2 "Lenders" Section 4.4.2 "Other Securities" Section 9.2.1.3 "PBGC" Section 7.3.1 "Preemption Notice" Section 9.2.1.1 "Preferred Stock" Section 2.2 "Preferred Stock Repurchase Agreement" Section 4.4.4 "Principal" Section 4.4.3 "Principal Merger Agreement" Section 4.4.6 "Professional Services Agreement" Section 4.4.5
-28- 35 "Proposed Subscriber" Section 9.2.1.1 "Qualifying Public Offering" Section 9.2.3. "Registration Rights Agreement" Section 4.3.8 "Related Agreements" Section 4.4 "Senior Financing" Section 4.4.2 "Senior Preferred Stock" Section 2.1 "Shareholders Agreement" Section 4.4.7 "Subject Securities" Section 9.2 "Subsequent Closing" Section 3.3 "Subsequent Closing Date" Section 3.3 "Transactions" Section 3.4 "Warrants" Section 2.4 "144A Information" Section 7.4
Certain other terms are defined in the Exhibits hereto and are used therein with the meanings so defined. 12.2 Action. The term "Action" shall mean any claim, action, cause of action or suit (in contract or tort or otherwise), arbitration, inquiry, proceeding or investigation by or before any Governmental Authority. 12.3 Affiliate. The term "Affiliate" (which shall be deemed to refer to the Company unless another Person is specified) shall mean any Person directly or indirectly controlling, controlled by or under direct or indirect common control with the Company (or such other specified Person) and shall include (i) any Person who is an officer, director or beneficial holder of at least 5% of the outstanding equity interest of the Company (or such other specified Person) and Members of the immediate Family of any such officer, director or holder, (ii) any Person of which the company (or such other specified Person) or an Affiliate (as defined in clause (i) above) of the Company (or such other specified Person) shall, directly or indirectly, either beneficially own at least 5% of the outstanding equity interest or constitute at least 5% participant or shall be an officer or director of such Person, and Members of the Immediate Family, if any, of such holder, director or officer, and (iii) in the case of a specified Person who is an individual, Members of the Immediate Family of such Person; provided, however, that you shall not be an Affiliate of the Company for purposes of this Agreement. 12.4 AmSouth. The term "AmSouth" shall mean AmSouth Bancorporation, a Delaware corporation. 12.5 Applicable Percentage. The term "Applicable Percentage" shall mean, with respect to any holder of Investor Securities and any class of Subject Securities, the percentage of all outstanding shares of that class of Subject Securities which would be held by such holder assuming that all outstanding Equity Securities of the Company are converted, or exchanged or exercised, in accordance with the terms thereof. -29- 36 12.6. Brim Rollover Stockholders. The term "Brim Rollover Stockholders" shall mean the persons listed on Schedule I of the Shareholders Agreement. 12.7. Business Day. The term "Business Day" shall mean any day on which banking institutions in Nashville, Tennessee and New York, New York are customarily open for the purpose of transacting business. 12.8. By-laws. The term "By-laws" shall include all written rules, regulations, procedures and by-laws and all other documents relating to the management, governance or internal regulation of a Person other than an individual, or interpretive of the Charter of such Person, each as from time to time amended or modified. 12.9. Capitalized Lease. The term "Capitalized Lease" shall mean any lease which is or should be capitalized on the balance sheet of the lessee in accordance with generally accepted accounting principles. 12.10. Charter. The term "Charter" shall include the articles or certificate of incorporation (including any certificate of designation), statute, constitution, joint venture or partnership agreement or articles or other charter of any Person other than an individual, each as from time to time amended or modified. 12.11. COBRA. The term "COBRA" shall mean the federal Consolidated Omnibus Budget Reconciliation Act of 1985 or any successor statute, and the rules and regulations thereunder, and in the case of any referenced section of any such statute, rule or regulation, any successor section thereof, collectively and as from time to time amended and in effect. 12.12. Code. The term "Code" shall mean the federal Internal Revenue Code of 1986 or any successor statute, and the rules and regulations thereunder, and in the case of any referenced section of any such statute, rule or regulation, any successor thereof, collectively and from time to time amended and in effect. 12.13. Commission. The term "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act, the Exchange Act or both. 12.14. Consolidated. The term "consolidated" shall mean, when used with reference to any term, that term as applied to the accounts of the Company (or other indicated Person) and each of its Subsidiaries, consolidated in accordance with generally accepted accounting principles after eliminating all inter-company items and with appropriate deductions for minority interests in Subsidiaries. 12.15. Contractual Obligation. The term "Contractual Obligation" shall mean, with -30- 37 respect to any Person, any contract, agreement, deed, mortgage, lease, license, indenture, commitment, undertaking, arrangement or understanding, written or oral, or other document or instrument, including, without limitation, any document or instrument evidencing or otherwise relating to any indebtedness but excluding the Charter and By-laws of such Person, to which or by which such Person is a party or otherwise subject or bound or to which or by which any property or right of such Person is subject or bound. 12.16. Distribution. The term "Distribution" shall mean (i) the declaration or payment of any dividend or other distribution on or in respect of any Equity Security of any Subject Entity, other than dividends payable on Common Stock solely in shares of Common Stock and (ii) the purchase, redemption or other retirement of any Equity Security of any Subject Entity, whether directly or indirectly through a Subsidiary or otherwise. 12.17. Employee Benefit Plan. The term "Employee Benefit Plan" shall mean any employee benefit plan within the meaning of section 2510.3(3) of ERISA subject to part 4 of Subtitle B of Title 1 of ERISA or to section 4975 of the Code. 12.18. Equity Owners. The Persons that own the Common Stock of the Company immediately after the Closing. 12.19. ERISA. The term "ERISA" shall mean the federal Employee Retirement Income Security Act of 1974 or any successor statute, and the rules and regulations thereunder, and in the case of any referenced section of any such statute, rule or regulation, any successor section thereto, collectively and as from time to time amended and in effect. 12.20. Exchange Act. The term "Exchange Act" shall mean the Securities Exchange Act of 1934, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. 12.21. Equity Securities. The term "Equity Securities" shall mean, with respect to any Person which is not a natural person, all shares of capital stock or other equity or beneficial interests issued by or created in or by such Person, all stock appreciation or similar rights or grants of, or other Contractual Obligation for, any right to share in the equity, income, revenues or cash flow of such Person, and all securities or other rights, warrants or other Contractual Obligations to acquire any of the foregoing, whether by conversion, exchange, exercise, preemptive right or otherwise. 12.22. Financial Institution. A Person described in Rule 144A(a)(l)(i), (iv), or (vi) promulgated under the Securities Act. 12.23. First Union. The term "First Union" shall mean First Union Corporation of Virginia, a Virginia corporation. -31- 38 12.24. Foreign Trade Regulations. The term "Foreign Trade Regulations" means (a) any act that prohibits or restricts, or empowers the President or any executive agency of the United States of America to prohibit or restrict, exports to or financial transactions with any foreign country or foreign national, (b) the regulations with respect to certain prohibited foreign trade transactions set forth at 15 C.F.R. Parts 730 et seq., 22 C.F.R. Parts 120-130 and 31 C.F.R. Parts 500 et seq. and (c) any order, regulation, ruling, interpretation, direction, instruction or notice relating to any of the foregoing, all as from time to time in effect. 12.25. Generally Accepted Accounting Principles. The term "generally accepted accounting principles" shall mean generally accepted accounting principles as defined by the Financial Accounting Standards Board, as in effect on December 31, 1994 and as applied by the Subject Entities in their consolidated financial statements dated December 31, 1994 referred to in clause (a) of Section 4.3.1 hereof and consistently followed thereafter without giving effect to any subsequent changes in such accounting principles; provided, however, that for purposes of the financial statements to be delivered pursuant to Section 7.1 hereof, "generally accepted accounting principles" shall mean such principles as defined by the Financial Accounting Standards Board, as from time to time in effect. 12.26. Governmental Authority. The term "Governmental Authority" shall mean any U.S. federal, state or local or any foreign government, governmental authority, regulatory or administrative agency, governmental commission, court or tribunal (or any department, bureau or division thereof) or any arbitral body. 12.27. Indebtedness. The term "Indebtedness" shall have the same meaning as the term "Debt" has under the Credit Agreement. 12.28. Investment. The term "Investment" shall mean (i) any share of capital stock, evidence of Indebtedness or other security issued by any other Person, (ii) any loan, advance, or extension of credit to, or contribution to the capital of, any other Person, (iii) any purchase of the securities or business or integral part of the business of any other Person, or commitment or option to make such purchase if, in the case of an option, the consideration therefor exceeds $1,000, including without limitation the entering into of local marketing agreements and similar agreements, and (iv) any other investment; provided, however, that the term "Investment" shall not include (a) current trade and customer accounts receivable arising in the ordinary course of business and payable in accordance with customary trade terms or prepaid assets arising in the ordinary course of business, (b) advances to employees for travel expenses, drawing accounts and similar expenditures, or (c) demand deposits in banks or trust companies the entire principal amount of which is subject to deposit insurance provided by the Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance Corporation. 12.29. Legal Requirement. The term "Legal Requirement" shall mean any federal, state, local or foreign law, statute, standard, ordinance, code, order, rule, regulation, resolution, promulgation, or any order, judgment or decree of any court, arbitrator, tribunal or governmental -32- 39 authority, or any license, franchise, permit or similar right granted under any of the foregoing, or any similar provision having the force and effect of law. 12.30. Lien. The term "Lien" shall mean (a) any mortgage, pledge, lien, charge, security interest or other similar encumbrance or restriction of any kind upon any property or assets of any character, or upon the income or profits therefrom or upon the transfer thereof; (b) any acquisition of or agreement to have an option to acquire any property or assets upon conditional sale or other title retention agreement, device or arrangement (including a capitalized lease); or (c) any sale, assignment, pledge or other transfer for security of any accounts, general intangibles or chattel paper, with or without recourse. 12.31. Major Holder. The term "Major Holder" with respect to any class of Investor Securities shall mean (i) you, so long as you hold that class of Investor Securities, or (ii) any holder of 25% or more of the securities constituting Investor Securities of that class of Investor Securities then outstanding. 12.32. Material Adverse Change; Material Adverse Effect. The terms "Material Adverse Change" and "Material Adverse Effect" shall mean, respectively, any adverse change in or effect on the business, operations, assets, prospects or condition, financial or otherwise, of any Subject Entity which, when considered either singly or together with all other adverse changes and effects with respect to which either such phrase is used in this Agreement, is material to the Subject Entities considered as one enterprise. 12.33. Members of the Immediate Family. The term "Members of the Immediate Family", as applied to any individual, shall include each parent, spouse, child, brother, sister and the spouse of a child, brother, or sister of the individual, and each trust created for the benefit of one or more of such persons and each custodian of the property of one or more such persons. 12.34. Multiemployer Plan. The term "Multiemployer Plan" shall mean any Pension Plan which is a "multiemployer plan" within the meaning of Section 4001(a)(3) of ERISA. 12.35. Operating Company. The term "Operating Company" shall mean an "operating company" within the meaning of Department of Labor Regulation ss. 2510.3-101(c) or successor rule or regulation, as from time to time amended and in effect. 12.36. Option Plan. The term "Option Plan" shall mean an employee stock option plan to be adopted by the Company together with any amendments thereto, which shall provide for the issuance of options to purchase not more than 5% of the outstanding Common Stock of the Company on a fully diluted basis, after giving effect to the Closing and the transactions contemplated by Section 6 of the Shareholders Agreement as in effect on the date hereof. Martin S. Rash and Richard D. Gore shall not be eligible to receive option grants under the Option Plan. -33- 40 12.37. Pension Plan. The term "Pension Plan" shall mean each pension plan (as defined in Section 3(2) of ERISA) subject to the minimum funding requirements of Section 412 of the Code or Section 302 of ERISA established or maintained, or to which contributions are made, by the Company or any of its Subsidiaries or with respect to which the Company or any of its Subsidiaries has any liability. 12.38. Person. The term "Person" shall mean an individual, partnership, limited liability company, corporation, association, trust, joint venture or unincorporated organization, and any government, governmental department or agency or political subdivision thereof. 12.39. Plan Assets. The term "Plan Assets" shall mean "plan assets" within the meaning of Department of Labor Regulation ss. 2510.3-101. 12.40. Public Sale. The term "Public Sale" shall mean a distribution pursuant to a registration statement under the Securities Act or, if the securities sold are of a class which is publicly traded as evidenced by listing with a national securities exchange, on the NASDAQ National Market or otherwise, a sale to the public which is exempt from the registration requirements of the Securities Act under Rule 144 thereunder or otherwise. 12.41. Redemption. The term "Redemption" shall mean the redemption by the Company of all of its outstanding shares of Redeemable Preferred Stock. 12.42. Required Holders. The term "Required Holders" shall mean, with respect to any class or type of Investor Securities, the holder or holders at the relevant time (excluding the Subject Entities) of more than 50% of the number of outstanding shares, as the case may be, of the specified class or type of Investor Securities. 12.43. Rule 144A. The term "Rule 144A" shall mean Rule 144A of the Commission's rules and regulations promulgated under the Securities Act, and any successor rule or regulation thereto, and in the case of any referenced section of such Rule, any successor section thereto, collectively and as from time to time amended and in effect. 12.44. Securities Act. The term "Securities Act" shall mean the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. 12.45. Single Employer Plan. The term "Single Employer Plan" shall mean any Pension Plan which is not a Multiemployer Plan. 12.46. Stockholder. The term "Stockholder" shall mean each Person who holds any Equity Security of the Company. -34- 41 12.47. Subject Entity. The term "Subject Entity" shall mean the Company and each of its Subsidiaries. 12.48. Subsidiary. The term "Subsidiary" shall mean any Person of which the Company or any other specified Person now or hereafter shall at the time own directly or indirectly through a Subsidiary at least a majority of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally. 12.49. Welfare Plan. The term "Welfare Plan" shall mean each welfare plan (as defined in Section 3(1) of ERISA) established or maintained, or to which any contributions are or were made, by the Company or Subsidiaries of the Company, or with respect to which the Company or any of its Subsidiaries has any liability. 12.50. Wholly Owned Subsidiary. The term "Wholly Owned Subsidiary" shall mean any Subsidiary all of whose outstanding Equity Securities are owned by the Company (or any other specified Person), directly or indirectly through a Wholly Owned Subsidiary. 13. EXPENSES, INDEMNITY. 13.1. Expenses. Whether or not the transactions contemplated by this Agreement shall be consummated, the Company hereby agrees to pay on demand all reasonable out-of-pocket expenses incurred by you in connection with such transactions and operations hereunder (other than expenses incurred in the normal course of investment monitoring) and in connection with any amendments or waivers (whether or not the same become effective) hereof and of the other Related Agreements and all expenses incurred by any of you or any holder of any Investor Securities issued hereunder in connection with the enforcement in good faith of any rights hereunder, under any other Related Agreement or under the Charter of the Company, including without limitation: (a) the reasonable cost and expenses of preparing and duplicating this Agreement; (b) the reasonable cost of delivering to your principal office, insured to your reasonable satisfaction, the Investor Securities sold to you hereunder and any Investor Securities delivered to you in exchange therefor or upon any conversion or substitution thereof, in any such case insured to your satisfaction; (c) the reasonable fees, expenses and disbursements of Ropes & Gray in connection with the transactions contemplated by this Agreement; (d) all taxes (other than taxes determined with respect to income and transfer taxes that may be payable upon a transfer), including any recording fees and filing fees and documentary stamp and similar taxes at any time payable in respect of this Agreement, any other Related Agreement, or the issuance of any of the Investor Securities; (e) the reasonable out-of-pocket expenses incurred by each Major Preferred Holder in respect of one person in attending meetings of the Board of Directors or committees thereof, and (f) the reasonable out-of-pocket expenses incurred by each Common Holder, and the reasonable out-of-pocket expenses incurred by the Director Designee in respect of the Director Designee attending meetings of the Board of Directors or committees thereof; provided, however, that you and each holder of Investor Securities shall bear the fees and disbursements of counsel for such of you or such holder in connection with all opinions rendered -35- 42 by such counsel pursuant to Section 11 hereof. 13.2. Indemnity. 13.2.1. The Company hereby further agrees to indemnify, exonerate and hold you and each of your stockholders, officers, directors, employees and agents free and harmless from and against any and all Actions, losses, liabilities and damages, and any investigation or proceeding instituted by any Governmental Authority or any other Person, and reasonable expenses in connection therewith, including without limitation reasonable attorneys' fees and disbursements, incurred in any capacity by the indemnitee or any of them as a result of, or arising out of, or relating to any transaction financed or to be financed in whole or in part directly or indirectly with proceeds from the sale by the Company of any of the Investor Securities, except for any of such indemnified liabilities arising on account of any indemnitee's gross negligence, willful misconduct or bad faith. 13.2.2. Each of the Company and you hereby agree to indemnify each other against and hold each other harmless from any claim, demand or liability for any broker's, finder's or placement fees or lender's incentive fees alleged to have been incurred by the Company or you, as the case may be, in connection with the transactions contemplated by this Agreement, including without limitation reasonable legal fees arising in connection with any such claim, demand or liability; provided, however, that the Company shall bear the fees and expenses referred to in Section 13.1. 13.3. The obligations of the Company to you under this Section 13 shall survive the redemption, repurchase or transfer of any or all of the Investor Securities. 14. NOTICES. Any notice or other communication in connection with this Agreement or the Investor Securities shall be deemed to be delivered if in writing (or in the form of a telex or telecopy to be given only during the recipient's normal business hours unless arrangements have otherwise been made to receive such notice by telex or telecopy outside of normal business hours) addressed as provided below and if either (a) actually delivered at said address or (b) in the case of a letter, seven business days shall have elapsed after the same shall have been deposited in the United States mails, postage prepaid and registered or certified: If to the Company, to it at the address set forth on page 1, with a courtesy copy (not necessary to constitute notice hereunder) to Kirkland & Ellis, 200 East Randolph Drive, Chicago, Illinois 60601 (Attention: Kevin R. Evanich, P.C.), or at such other address as such Person shall have specified by notice actually received by you. If to you, to your address set forth on page 1 hereof, or at such other address as you shall have specified by notice actually received by the Company, with a copy to Ropes & Gray, One International Place, Boston, Massachusetts 02110-2624, Attention: Mary E. Weber, Esq. -36- 43 If to any other holder of record of any Investor Security, to it at its address set forth in the relevant registers of the Company. 15. SURVIVAL. All covenants, agreements, representations and warranties made herein or in any other document referred to herein or delivered to you pursuant hereto or in connection herewith shall be deemed to have been material and relied on by you, notwithstanding any investigation made by you or on your behalf, and shall survive the execution and delivery to you of this Agreement and of the Investor Securities. 16. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and Required Holders. Any amendment or waiver effected in accordance with this Section 16 shall be binding upon each holder of any Investor Securities and the Company. 17. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED, THE COMPANY HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION, OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR ANY OTHER RELATED AGREEMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY OBLIGATION HEREUNDER OR THEREUNDER OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE HOLDERS OF INVESTOR SECURITIES OR THE COMPANY OR ANY OF THEM IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. THE COMPANY ACKNOWLEDGES THAT IT HAS BEEN INFORMED BY YOU THAT THE PROVISIONS OF THIS SECTION 18 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH YOU HAVE RELIED, ARE RELYING AND WILL RELY IN ENTERING INTO THIS AGREEMENT, AND SUCH OF THE RELATED AGREEMENTS TO WHICH YOU ARE A PARTY. You or the Company may file an original counterpart or a copy of this Section 17 with any court as written evidence of the consent of the Company to the waiver of its right to trial by jury. 18. SERVICE OF PROCESS. The Company, by its execution hereof, (a) hereby irrevocably submits to the non-exclusive jurisdiction of the state courts of the State of New York and to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement or any other Related Agreement or the subject matter hereof or thereof brought by you or any of your successors or assigns, and (b) hereby waives to the extent not prohibited by law, and agrees not to assert, by way of motion, as a defense or otherwise, in any such proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its -37- 44 property is exempt or immune from attachment or execution, that any such proceeding brought in one of the above-named courts is improper or that this Agreement or the subject matter hereof or thereof, may not be enforced in or by such court. The Company hereby consents to service of process in any such proceeding in any manner permitted by New York law and agrees that service of process by registered or certified mail, return receipt requested, at its address referred to in or specified pursuant to Section 14 hereof, is reasonably calculated to give actual notice. 19. APPLICABLE REMEDIES. The Company hereby agrees that the holders of the Investor Securities have no adequate remedy at law, for monetary compensation or otherwise, for the damages that would be suffered if the Company were to fail to comply with its obligations hereunder, and that the Company therefore agrees that the holders of the Investor Securities shall be entitled to obtain specific performance of the obligations of the Company herein and therein contained. 20. MISCELLANEOUS. This Agreement, the other Related Agreements, and the Charter of the Company set forth the entire understanding of the parties hereto with respect to the transactions contemplated hereby and supersede any prior written or oral understandings with respect thereto. The invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of any other term or provision hereof. The headings in this Agreement are for convenience of reference only and shall not alter or otherwise affect the meaning hereof. This Agreement is intended to take effect as a sealed instrument and may be executed in any number of counterparts which together shall constitute one instrument and shall be governed by and construed in accordance with the domestic substantive laws of The State of New York without giving effect to any choice or conflict of law provision or rule that would cause the application of the domestic substantive laws of any other jurisdiction. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. Whether or not any express assignment has been made in this Agreement, provisions of this Agreement that are for your benefit as the holder of any Investor Securities are also for the benefit of, and enforceable by, all subsequent holders of Investor Securities, except as otherwise expressly provided herein. -38- 45 If the foregoing corresponds with your understanding of our agreement, kindly sign this letter and the accompanying copies thereof in the appropriate space below and return one counterpart of the same to the Company whereupon this letter shall become and be a binding agreement between you and the Company. Very truly yours, SEAL BRIM, INC. Attest: By: /s/ Martin S. Rash Title: -------------------------------------- Title: C.E.O. Accept and Agreed to: LEEWAY & CO. By: /s/ Edward J. Lavin Jr. ----------------------------- Title: Vice President EX-4.7 6 SECOND AMENDMENT TO CREDIT AGREEMENT 1 Exhibit 4.7 SECOND AMENDMENT TO CREDIT AGREEMENT AND MODIFICATION OF LOAN DOCUMENTS THIS SECOND AMENDMENT TO CREDIT AGREEMENT AND MODIFICATION OF LOAN DOCUMENTS, dated August _, 1997 (this' "Amendment"), is by and between PRINCIPAL HOSPITAL COMPANY, an Oregon corporation formerly known as Brim, Inc. (the "Borrower"), the financial institutions from time to time party to the Credit Agreement (as hereinafter defined) (the "Lenders") and FIRST UNION NATIONAL BANK, formerly known as First Union National Bank of North Carolina, as Agent for the Lenders (in such capacity, the "Agent"), and amends the Credit Agreement dated as of December 17, 1997, as amended by a First Amendment dated March 26, 1997 (the "First Amendment"), between the Borrower, the Lenders and the Agent (the "Credit Agreement"). Capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. RECITALS A. Pursuant to the Credit Agreement, the Lenders extended to the Borrower Term Loans in the aggregate principal amount of $35,000,000 and Revolving Credit Loans in the aggregate principal amount of up to $65,000,000. B. The Borrower has requested that the Agent and the Lenders amend the Credit Agreement to modify certain covenants, all in accordance with the terms hereof. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Required Lenders and the Agent, for themselves, their successors and assigns, agree as follows: ARTICLE I AMENDMENTS 1.1 Definitions. The defined term "Annualized Capital Expenditures" set forth in ARTICLE I is hereby deleted. The defined term "Fixed Charges" set forth in ARTICLE I is hereby deleted in its entirety and there is substituted in its place the following: "Fixed Charges" shall mean, as of the last day of any fiscal quarter, (a) Scheduled Principal Payments, plus (b) the sum of the following as of the fiscal quarter then ending: (i) Annualized Interest Expense payable in cash, (ii) Annualized Lease Expense, (iii) actual Capital Expenditures year-to-date for such fiscal year and (iv) Annualized Cash Taxes. 1.2 Financial Covenants. SECTION 6.15 is hereby deleted in its entirety and there is substituted in its place the following: 2 6.15 Capital Expenditures. Permit Capital Expenditures (i) for the fiscal year ending December 31, 1997 to exceed $8,300,000 and (ii) for any fiscal year, beginning with the fiscal year beginning January 1, 1998, to exceed five percent (5%) of Consolidated Net Revenues for the four (4) fiscal quarters ending on the last day of the previous year, adjusted for inflation based on the consumer price index as determined by the Agent, plus proceeds of insurance with respect to any loss of Collateral (to the extent used to replace or replace such Collateral), plus proceeds of the disposition of assets permitted by SECTION 6.5. 1.3 Revolving Credit Borrowing Availability/Palestine Limited Partnership. For purposes of the Revolving Credit borrowing Availability, commencing on the date of this Amendment, the Borrower may include actual annualized EBITDAR of Palestine Limited Partnership for the relevant period multiplied by three (3), notwithstanding the amount of the obligations guaranteed by Palestine Limited Partnership. ARTICLE II LOAN DOCUMENTS Any individual or collective reference to any of the Loan Documents in any of the other Loan Documents to which the Borrower or any Guarantor is a party shall mean, unless otherwise specifically provided, such Loan Document as amended by this Amendment, and as it is further amended, restated, supplemented or modified from time to time and any substitute or replacement therefor or renewals thereof, including without limitation, all references to the Credit Agreement, which shall mean the Credit Agreement as amended hereby and as further amended from time to time. ARTICLE III OJAI VALLEY COMMUNITY HOSPITAL 3.1 Purchase Extension. Pursuant to SECTION 5.17 of the Credit Agreement, the Borrower was going to acquire Ojai Valley Community Hospital by June 30, 1997 and such date was extended by letter agreement until July 31, 1997. The Required Lenders hereby agree to amend SECTION 5.17 of the Credit Agreement to change the reference from "July 31, 1997" to "August 15, 1997. ARTICLE IV CONDITIONS PRECEDENT This Amendment and the obligations of the Lenders to continue to extend credit under the terms of the Credit Agreement are subject to the satisfaction of all of the following conditions precedent: 4.1 Execution of this Amendment. This Amendment shall have been executed and delivered by the Borrower, the Agent and the Required Lenders, it being expressly understood that the terms of this Amendment require the express consent of Lenders holding 66 2/3% or more of the sum of the -2- 3 aggregate principal amount of the Term Loans and Revolving Credit Commitments outstanding as of the dare hereof. 4.2 No Default. After giving effect to this Amendment, no Default or Event of Default shall have occurred and be continuing, and the Agent and the Lenders shall have received a certificate from the chief executive officer or the chief financial officer of the Borrower to such effect. 4.3 Guarantor Confirmation. The Agent and the Lenders shall have received written confirmation by the Guarantors of their obligations under the Guaranty Documents. 4.4 Governmental Approvals. All necessary approvals, authorizations and consents, if any be required, of all governmental bodies (including courts) having jurisdiction with respect to the transactions contemplated by this Amendment shall have been obtained. 4.5 No Injunction, Etc. No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain substantial damages in respect of, or which is related to or arises out of this Amendment or the consummation of the transactions contemplated hereby or which, in the Lenders' sole discretion, would make it inadvisable to consummate the transactions contemplated by this Amendment. 4.6 No Material Adverse Change. In the reasonable judgment of the Agent, there shall not have occurred any material adverse change in the business, business prospects, financial condition or results of operations of the Borrower or any Guarantor, or any event, condition or state of facts that would be reasonably expected materially and adversely to affect the business, business prospects, financial condition or results or operations of the Borrower or any Guarantor. ARTICLE V GENERAL 5.1 Full Force and Effect. As expressly amended hereby, the Credit Agreement and each Loan Document shall continue in full force and effect in accordance with the provisions thereof on the date hereof. As used in the Credit Agreement, "hereinafter," "hereto, " "hereof" and words of similar import shall mean, unless the context otherwise requires, the Credit Agreement as amended by this Amendment. 5.2 Representations and Warranties. After giving effect to this Amendment, the representations and warranties set forth in the Credit Agreement are true and correct as of the date hereof, except to the extent such representations and warranties relate solely to or are specifically expressed as of a particular date or period. 5.3 Release. The Borrower hereby releases and discharges the Agent and each of the Lenders, their directors, officers, agents, and employees, from any and all causes of action, suits, claims, demands. liabilities and obligations whatsoever, in law or in equity, whether the same are now known or unknown or whether the facts on which the same are based are now known or unknown, which they ever had, now have or hereafter may have by reason of any matter, act or omission whatsoever occurring -3- 4 on or before the date of this Amendment, except for any claims arising out of any wanton or willful misconduct or gross negligence on the part of the Agent or any Lender. 5.4 Applicable law. This Amendment shall be governed by and construed in accordance with the laws and judicial decisions of the State of North Carolina without reference to conflicts of law principles. 5.5 Counterparts; Terms. This Amendment may be executed in two or more counterparts, each of which shall constitute an original, but all of which when taken together shall constitute but one instrument. 5.6 Expenses. The Borrower agrees to pay all reasonable out-of-pocket expenses incurred by the Agent in connection with the preparation, execution and delivery of this Amendment, including, without limitation, all fees and disbursements of Agent's counsel. 5.7 Headings. The headings of this Amendment are for the purposes of reference only and shall nor affect the construction of this Amendment. 5.8 Valid Amendment. The parties acknowledge that, when executed and delivered by the Borrower, the Agent and the Required Lenders, this Amendment complies in all respects with SECTION 10.8 of the Credit Agreement, which sets forth the requirements for amendments thereto. (signatures begin next page) -4- 5 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in their corporate names by their duly authorized corporate officers as of the date first above written. PRINCIPAL HOSPITAL COMPANY By: /s/ Richard D. Gore ---------------------------------------- Name: Richard D. Gore ------------------------------------- Title: Executive VP and CFO ------------------------------------ FIRST UNION NATIONAL BANK, as Agent and as Issuing Bank By: /s/ Joseph H. Towell --------------------------------------- Name: Joseph H. Towell ------------------------------------- Title: Senior Vice President ------------------------------------ (signatures continued) -5- 6 LENDERS: FIRST UNION NATIONAL BANK By: /s/ Joseph H. Towell --------------------------------------- Name: Joseph H. Towell ------------------------------------ Title: Senior Vice President ----------------------------------- AMSOUTH BANK OF ALABAMA By: /s/ Keith S. Law ------------------------------------- Name: Keith S. Law ----------------------------------- Title: Vice President ---------------------------------- LEHMAN COMMERCIAL PAPER INC. By: /s/ Michele ------------------------------------- Name: Michele ----------------------------------- Title: Authorized ---------------------------------- CREDIT LYONNAIS NEW YORK BRANCH By: /s/ F. Tavangar ------------------------------------- Name: Farboud Tavangar ----------------------------------- Title: First Vice President ---------------------------------- BANQUE PARIBAS HOUSTON AGENCY By: /s/ Glenn E. Msaley -------------------------------------- Name: Glenn E. Msaley ----------------------------------- Title: Vice President ---------------------------------- By: /s/ T. A. Donnon ------------------------------------- Name: Timothy A. Donnon ----------------------------------- Title: Regional General Manager ---------------------------------- (signatures continued) 6 7 KEY BANK OF OREGON By: /s/ Charles S. Stoop ------------------------------------- Name: Charles S. Stoop ----------------------------------- Title: Assistant Vice President ---------------------------------- NATIONAL CITY BANK OF KENTUCKY By: /s/ Roderic M. Brown ------------------------------------- Name: Roderic M. Brown ----------------------------------- Title: Vice President ---------------------------------- UNION BANK OF CALIFORNIA, N.A. By: /s/ Lynn E. Vine ------------------------------------- Name: Lynn E. Vine ----------------------------------- Title: Vice President ---------------------------------- FIRST AMERICAN NATIONAL BANK By: /s/ Sandy Hamrick ------------------------------------- Name: Sandy Hamrick ----------------------------------- Title: Vice President ---------------------------------- -7- EX-10.1 7 INVESTMENT AGREEMENT 1 Exhibit 10.1 INVESTMENT AGREEMENT DATED AS OF NOVEMBER 21, 1996 BY AND BETWEEN BRIM, INC. AND GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P. 2 INVESTMENT AGREEMENT This Agreement is made and entered into as of this 21st day of November, 1996 by and between Brim, Inc. (the "Company") and Golder, Thoma, Cressey, Rauner Fund IV, L.P., a Delaware limited partnership ("Purchaser") and Principal Hospital Company, a Delaware corporation ("Principal"). RECITALS This Agreement describes a series of transactions, some of which shall be consummated pursuant to the terms hereof and some of which shall be consummated pursuant to the terms of certain agreements described or referenced herein, by which the Company will be reorganized and recapitalized (the "Recapitalization") and will divest certain assets and operating entities and will acquire by merger Principal. Due to the complexity of these transactions, they will be briefly described in steps in the following recitals: STEP ONE: THE CARRYCO MERGER A. Prior to the closing of the Investment (as defined below) by Purchaser, certain of the officers of the Company all of whom are shareholders of the Company and as of the date hereof collectively own approximately 67% of the Company's fully diluted common stock (the "Carryover Shareholders") will form a new Oregon corporation to be known as Carryco, Inc. ("Carryco"). The Carryover Shareholders will contribute to Carryco a number of shares of common stock of the Company that will have a value estimated to be $4 million, as determined by reference to the anticipated cash payment that the other current common shareholders will receive upon consummation of all of the transactions provided for herein. B. Thereafter and prior to the closing of the Investment, the Company and Carryco will adopt a plan and agreement of merger pursuant to which Carryco will be merged with and into the Company (the "Carryco Merger"). The Company will be the surviving entity. As consideration to the current holders of the common stock of the Company for the Carryco Merger, each share of outstanding common stock of the Company will be exchanged for one share of a newly designated redeemable junior preferred stock of the Company (the "Redeemable Junior Preferred"), and each option to purchase common stock of the Company will be converted into the option to purchase a like number of shares of the Redeemable Junior Preferred. The outstanding preferred stock of the Company (the "GECC Preferred") will not be affected by the Carryco Merger. As consideration to the Carryover Shareholders for the Carryco Merger, each Carryover Shareholder will receive shares of a newly designated junior preferred stock and shares of common stock of the Company, each in the same proportion as the shares of common and junior preferred stock to be issued to Purchaser in connection with the transaction described in Paragraph H(i) that comprises a portion of the Investment. The Carryco Merger will occur approximately one day prior to the closing of the Investment. 2 3 C. Prior to the closing of the Carryco Merger, the Company will amend its Articles of Incorporation to authorize the issuance of a newly designated series of preferred stock and a newly designated series of senior preferred stock, all of which shall by their terms be junior in priority to the GECC Preferred Stock. D. Upon consummation of the Carryco Merger, the Company will cancel, as treasury shares, the shares of its common stock acquired from Carryco through the Carryco Merger. E. Prior to the closing of the Investment, the Company will form a new wholly owned subsidiary to be known as Principal Merger Company. STEP TWO: THE DIVESTITURES Following the Carryco Merger and immediately prior to the closing of the Investment, the Company will dispose of certain assets and subsidiaries in the following series of transactions (collectively, the "Divestitures"): D. By Agreement and Plan of Merger of even date herewith (the "BSL Merger Agreement") the Company has agreed to merge its wholly owned subsidiary, Brim Senior Living, Inc. ("BSL"), with and into Encore Senior Living, LLC, a Delaware limited liability company ("Encore"), some of whose members consist of certain officers of the Company or its Subsidiaries, which officers are also shareholders of the Company and who as of the date hereof collectively own approximately 58% of the Company's fully diluted common stock, and to sell to Encore for a purchase price of $15 million (the "BSL Purchase Price") certain assets owned by the Company and used in connection with the operation of its senior living business (the "BSL Transaction"). E. By Purchase and Sale Agreement of even date herewith (the "Excluded Assets Purchase Agreement") the Company has agreed to sell to a newly formed limited liability company whose members consist of certain officers and employees of the Company, all of whom are shareholders of the Company and who as of the date hereof collectively own approximately 75% of the Company's fully diluted common stock, for a purchase price of $406,500 (the "Excluded Assets Purchase Price") plus the assumption of debt related thereto certain assets of the Company which are not directly related to its health care or its senior living operations (the "Excluded Assets Transaction"). F. By Purchase and Sale Agreement of even date herewith (the "MSL Purchase Agreement") the Company has agreed to sell to C-C Lantana, Inc, a Delaware corporation, which is a wholly owned subsidiary of CC-Development Group, Inc., for a purchase price of $3 million (the "MSL Purchase Price") all of the issued and outstanding common stock of its wholly owned subsidiary, Meridian Senior Living, Inc. ("MSL"), and by Purchase and Sale Agreement of even date 3 4 herewith (the "LP Purchase Agreement") the Company has agreed to sell to David McAllister and James Williams, officers of the Company, who collectively own approximately 27% of the Company's fully diluted common stock, for a purchase price of $1,000 (the "LP Purchase Price") its limited partnership interest in Meridian Park Village Limited Partnership (collectively, the "the "Freedom Village Transaction" and together with the BSL Transaction, the "Senior Living Transaction"). STEP THREE: THE FINANCING G. Following the Carryco Merger and immediately prior to the closing of the Investment, the Company will enter into a credit agreement with First Union National Bank of North Carolina pursuant to that Commitment Letter dated September 13, 1996 (the "First Union Commitment Letter"), a true and correct copy of which is attached hereto as Exhibit A (the "Credit Facility"), which Credit Facility shall provide for a loan in the principal amount of no less than $54,000,000 (the "First Union Loan Proceeds"). STEP FOUR: THE INVESTMENT H. Contemporaneously with closing the Credit Facility, (i) Purchaser and/or its designees will purchase from the Company shares of a newly designated class of junior preferred stock and of common stock and (ii) an investor selected by Purchaser will purchase from the Company shares of a newly designated class of senior preferred stock pursuant to that Commitment Letter dated September 17, 1996, a true and correct copy of which is attached hereto as Exhibit A (the "Investment Commitment Letter") (collectively, the "Investment"). STEP FIVE: THE REDEMPTION/THE ESCROWS I. Immediately following the closings of the Credit Facility, the Investment and the Divestitures and using the BSL Purchase Price, the MSL Purchase Price, the First Union Loan Proceeds and the Investment Proceeds (as defined below), the Redeemable Junior Preferred will be called for redemption and then redeemed by the Company and the GECC Preferred will be repurchased by the Company (collectively, the "Redemption") and the Escrow Account and the Agent/Legal Fees Expense Account will be established. STEP SIX: THE SUBSEQUENT TRANSACTION K. By Agreement and Plan of Merger to be executed and delivered after the Closing among the Company, Principal Merger Company (a transitory subsidiary of the Company) and Principal, the parties thereto will provide for the merger of Principal Merger Company with and into Principal so that, following the merger Principal will be a wholly-owned subsidiary of the Company (the "Subsequent Transaction") and in consideration therefor the shareholders of Principal will receive common stock of the Company. 4 5 Hereinafter the Recapitalization, the Financing, the Investment, the Divestitures and the Redemption will sometimes be collectively referred to as the "Transactions." NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: ARTICLE I THE REORGANIZATION, RECAPITALIZATION AND REDEMPTION 1.01. Carryco Merger. Subject to the terms and conditions hereof, prior to the Closing Date (as defined below), the Carryover Shareholders shall organize Carryco. The Carryover Shareholders and their proportionate capitalization of and interest in Carryco shall be as set forth on Exhibit B hereto. Carryco and the Company shall adopt a Plan and Agreement of Merger, substantially in the form set forth as Exhibit C hereto, providing for the Carryco Merger. The Carryco Merger shall be consummated on or about the day prior to the Closing Date as provided for in Paragraph 2.01 hereof and shall be conditioned on the Purchaser or the Purchaser's designees having deposited into escrow with a mutually acceptable escrow agent, the Investment Proceeds (as defined below) along with instructions (which instructions shall be irrevocable upon compliance by the Company and by the parties (including the Company) to the BSL Merger Agreement, the MSL Purchase Agreement, the LP Purchase Agreement, the Excluded Assets Purchase Agreement and the Carryco Merger with their obligations under each such agreement) directing the release of said funds upon the consummation of the Carryco Merger and the confirmation of the Company and the Purchaser that the conditions to closing provided for in this Agreement have been satisfied or waived. 1.02. The Divestitures. Following the Carryco Merger and immediately prior to the Closing, the Company shall consummate the Divestitures on the terms and conditions provided for in the BSL Merger Agreement, the MSL Stock Purchase Agreement, the LP Purchase Agreement and the Excluded Assets Purchase Agreement. As set forth more fully in the LP Purchase Agreement and the Excluded Assets Purchase Agreement, the LP Purchase Price and the Excluded Assets Purchase Price shall be payable by the purchasers to the Company in immediately available funds at the closing of the transaction provided for in the LP Purchase Agreement and in the Excluded Assets Transaction, respectively, and shall be retained by the Company from and after the closing of said transactions. As set forth more fully in the BSL Merger Agreement and the MSL Purchase Agreement, the BSL Purchase Price and the MSL Purchase Price shall be payable by the purchasers at the closings thereof as follows: (a) Fourteen Million Two Hundred Thousand and no/100 Dollars ($14,200,000) of the BSL Proceeds shall be paid in immediately available funds by wire transfer to the Company; and (b) Seven Hundred Fifty Thousand and no/100 Dollars ($750,000) of the BSL Proceeds shall be paid in immediately available funds to an interest bearing escrow account established at Key Bank of Oregon (the "Escrow Agent") and designated as the Brim/Senior Living Escrow Account 5 6 (the "Senior Living Escrow Account") to be held by the Escrow Agent in accordance with the terms of the escrow agreement executed in conjunction with the Senior Living Transaction (the "Senior Living Escrow Agreement"). (c) Fifty Thousand and no/100 Dollars ($50,000) of the BSL Proceeds shall be paid in immediately available funds to an interest bearing escrow account established with the Escrow Agent and designated as the "Agent/Legal Fees Escrow Account" to be held and applied by the Escrow Agent in accordance with the terms of Paragraph 1.04(b)(iii) hereof and with the terms of the Senior Living Escrow Agreement. (d) One Million Nine Hundred Fifty Thousand and no/100 Dollars ($1,950,000) of the MSL Proceeds shall be paid in immediately available funds by wire transfer to the Company. (e) One Million and no/100 Dollars ($1,000,000) of the MSL Proceeds shall be paid in immediately available funds to the Senior Living Escrow Account to be held by Escrow Agent in accordance with the terms of the Senior Living Escrow Agreement. (f) Fifty Thousand and no/100 Dollars ($50,000) of the MSL Proceeds shall be paid into the Agent/Legal Fees Escrow Account to be held and applied by the Escrow Agent in accordance with the terms of Paragraph 1.04(b)(iii) hereof and with the terms of the Senior Living Escrow Agreement; 1.03. The Financing. Following the Carryco Merger and the consummation of the Divestitures, the Company will enter into the Credit Facility. 1.04. The Investment. (a) Prior to the Closing Date and in anticipation of the consummation of the Redemption, the Company shall amend its charter to authorize the issuance of two additional series of preferred stock, one series to be designated Series A Senior Preferred Stock, having the rights and preferences set forth in Exhibit D hereto (the "Senior Preferred Stock"), and the other series to be designated Series B Junior Preferred Stock, having the rights and preferences set forth in Exhibit E hereto (the "Junior Preferred Stock" and together with the Senior Preferred Stock, the "New Preferred Stock", all of which shall, by their terms, be junior in priority to the GECC Preferred Stock until the repurchase of the GECC Preferred Stock upon consummation of the Redemption. (b) On the Closing Date, subject to the terms and conditions set forth herein, the Company shall issue (i) to Purchaser's designees and the Purchaser's designees shall purchase from the Company 20,000 shares of the Senior Preferred Stock, for an aggregate purchase price of $20 million, and (ii) to Purchaser and/or its designees and the Purchaser and/or its designees shall purchase from the Company such number of shares of the Junior Preferred Stock and shares of Common Stock as shall be necessary to ensure that there are sufficient funds available at Closing 6 7 to consummate the redemption of the Redeemable Junior Preferred and the GECC Preferred in accordance with the terms hereof, which funds are currently anticipated to be approximately $10,000,000. The aggregate purchase price for the New Preferred Stock and the common stock to be purchased by Purchaser and its designees is estimated to be approximately $30,000,000, and is referred to herein as the "Investment Proceeds." On the Closing Date, the Investment Proceeds and the First Union Loan Proceeds shall be payable to the Company as follows: (i) Sixty Nine Million Eight Hundred Thousand and no/100 Dollars ($69,800,000) shall be paid in immediately available funds by wire transfer to the Company. (ii) Four Million and no/100 Dollars ($4,000,000) shall be paid in immediately available funds to an interest bearing escrow account established by the Escrow Agent and designated as the "Brim/Principal Escrow Account" to be held by the Escrow Agent. (iii) Two Hundred Thousand and no/100 Dollars ($200,000) shall be paid in immediately available funds to the Agent/Legal Fees Expense Account to be used by Lee Zinsli, as the agent for the benefit of the former holders of the Redeemed Preferred Stock and of the GECC Preferred Stock (the "Agent") to pay any costs and expenses incurred by the Agent in connection with any claims made under the indemnity provisions hereof and/or under the indemnity provisions of the Senior Living Escrow Agreement. The funds in the Brim/Principal Escrow Account shall be disbursed in accordance with the provisions of Article IX hereof and/or any Escrow Agreement which may be executed pursuant thereto. (c) Concurrently with the Closing, the Company shall repurchase all of the GECC Preferred Stock pursuant to the terms of that Preferred Stock Repurchase Agreement entered into with General Electric Capital Corporation in the form attached hereto as Exhibit F (the "Preferred Stock Repurchase Agreement"). 1.05. Redemption of the Redeemable Junior Preferred and the GECC Preferred. (a) On or immediately prior to the Closing Date, the Company shall call for redemption all of the then outstanding shares of the Redeemable Junior Preferred (the "Redeemed Preferred Stock"). Purchaser acknowledges and agrees that the shares of Redeemable Junior Preferred may include shares of Redeemable Junior Preferred acquired upon the purchase or the exercise of the Options (as defined in Paragraph 3.02) and which are described more fully in Section 3.02(a) of the Company Disclosure Letter in accordance with Paragraph 1.05(b). In connection with the redemption of the Redeemed Preferred Stock, prior to Closing each holder will be advised of the procedures for surrendering to Key Bank of Oregon, the payment agent (the "Payment Agent") the certificates representing either the common stock which shall be converted into shares of Redeemable Junior Preferred in accordance with the terms of the Carryco Merger or the Redeemed Preferred Stock, as applicable. Upon surrender and exchange of a certificate to the Payment Agent in care of the Agent, the holder will be paid the amount of cash to which such holder is entitled 7 8 hereunder as a result of the closing of the Transactions less any amount required to be withheld under applicable federal income tax regulations. (b) Purchaser further acknowledges and agrees that between the date hereof and the Closing Date the Board of Directors or the shareholders, as applicable, of the Company shall have the right to take such action as may be necessary to either (i) declare any of such Options which are unvested as of the date hereof or as of the Closing Date to be vested as of the Closing Date (the "Accelerated Options") and, subject to the terms of the Stock Option Plans under which such Options were issued or to such other action as may be lawfully taken by the Board of Directors or shareholders of the Company, each of the holders thereof may exercise said Accelerated Options on or immediately prior to the Closing Date and shall in the event of the exercise thereof first receive the shares of Redeemable Junior Preferred which are due upon the exercise thereof (which Redeemable Junior Preferred will become part of the Redeemed Preferred Stock) and thereafter receive the amount due for the Redeemed Preferred Stock held by such option holder on the Closing Date in accordance with Paragraph 1.05(a) less the exercise price per share provided for in each such Accelerated Option or (ii) offer to purchase vested and unvested Options for a purchase price equal to the difference between the price per share owing at Closing to the holders of the Redeemed Preferred Stock and the exercise price under such Options, which purchase price shall be due and payable concurrently with the payment of the redemption price due to the holders of the Redeemed Preferred Stock (the "Purchased Options"). 1.06. The Redemption Price. Based on a continuing investment by the Carryover Shareholders of Three Million Nine Hundred Fifty Thousand Nine Hundred Forty and no/100 Dollars ($3,950,940), the aggregate redemption price for the Redeemed Preferred Stock and the GECC Preferred Stock shall be Eighty Five Million Nine Hundred Ninety Nine Thousand Sixty and no/100 Dollars ($85,999,060) (the "Redemption Price"). 1.07. Distribution of Redemption Price/Interest in Escrow Accounts. Prior to the distribution of the Redemption Price the Company shall deduct therefrom the amount of the Estimated Senior Living Tax Liability (as hereinafter defined), the Senior Living Smith Barney Fee (as hereinafter defined), the GECE Payment (as hereinafter defined) and any costs of the Senior Living Transaction as contemplated by Paragraph 10.14 in excess of $200,000 (collectively, the "Price Adjustments"), and shall pay to the appropriate third parties the amounts which are the subject of the Price Adjustments as and when due in accordance with the terms hereof, such that the proceeds distributed to the holder of the GECC Preferred Stock and the holders of the Redeemed Preferred Stock in connection with the Closing shall be in the aggregate amount of Eighty One Million Seven Hundred Ninety Thousand Eight Hundred Nineteen and no/100 Dollars ($81,790,819) (the "Net Redemption Price") and shall be allocated between the holder of the GECC Preferred Stock and the holders of the Redeemed Preferred Stock (the latter of which for purposes hereof shall include the holders of the Accelerated Options or the Purchased Options) as follows: 8 9 (a) GECC Preferred Stock: Thirty Million Three Thousand One Hundred Six and no/100 Dollars ($30,003,106), representing an accrued dividend of Two Million Six Hundred Twenty Four Thousand and no/100 Dollars ($2,624,000) and Twenty Seven Million Three Hundred Seventy Nine Thousand One Hundred Six and no/100 Dollars ($27,379,106) as the purchase price for the Seller's Shares. (b) Redeemed Preferred Stock: Fifty One Million Seven Hundred Eighty Seven Thousand Seven Hundred Thirteen and no/100 Dollars ($51,787,713); provided, however, that with respect to the holders of the Accelerated Options or the Purchased Options, as applicable, the portion of the Net Redemption Price distributed to them shall, as set forth more fully in Paragraph l.05(b), be equal to the difference between the price per share owing at Closing to the holders of the Redeemed Preferred Stock and the exercise price under such Options, with the excess retained by the Company as the consideration for the Redeemed Preferred Stock evidenced by said Accelerated Options or Purchased Options. The foregoing assumes the costs of the Senior Living Transaction borne by the holder of the GECC Preferred and the holders of the Redeemed Preferred Stock equals $500,000, it being understood and agreed that pursuant to Paragraph 10.14, the first $200,000 of such costs shall be borne by the Company and any excess of such costs shall be borne by the former shareholders of the Company through an offset against the Redemption Price which is reflected in the Net Redemption Price. In the event the costs are greater or less than said amount, the Net Redemption Price shall be reduced or increased respectively on a dollar for dollar basis by said difference and the amount distributed to each of GECC and the holders of the Redeemed Preferred Stock shall be adjusted accordingly. The foregoing also assumes that the Senior Living Tax Liability will be in an amount equal to the Estimated Senior Living Tax Liability. In the event of a change in the Senior Living Tax Liability at Closing in accordance with the final sentence of Paragraph 1.08, the Net Redemption Price shall be reduced or increased on a dollar for dollar basis by said difference and the amount distributed to each of GECC and the holders of the Redeemed Preferred Stock shall be adjusted accordingly. In addition, after the Closing the former holders of the Redeemed Preferred Stock, the GECC Preferred Stock, the Accelerated Options and/or the Purchased Options and the Carryover Shareholders shall have an interest in the Senior Living Escrow Account, in the Brim/Principal Escrow Account established under the terms of this Agreement and in the Agent/Legal Fees Expense Account. The interest of the holders of the Redeemed Preferred Stock and the GECC Preferred Stock in the Brim/Principal Escrow Account and in the Agent/Legal Fees Expense Account is set forth more fully in Paragraph IX hereof. The following table is inserted for purposes of summarizing the amounts set forth in Paragraphs 1.01 through this Paragraph 1.07: 9 10 REDEMPTION AND ALLOCATION OF PROCEEDS
- ------------------------------------------------------------------------------- Healthcare Senior Living Total Consideration Transaction Transaction - ------------------------------------------------------------------------------- Purchaser's Offer $78,000,000 $18,000,000 $96,000,000 - ------------------------------------------------------------------------------- Escrows: 4,200,000 1,850,000 6,050,000 GECC 1,505,644 663,200 2,168,845 Redeemed Preferred Shareholders 2,694,356 1,186,800 3,881,155 - ------------------------------------------------------------------------------- Carryover 3,950,940 3,950,940 Shareholders Investment - ------------------------------------------------------------------------------- Redemption Price 69,849,060 16,150,000 85,999,060 - ------------------------------------------------------------------------------- Less: Payment for (150,000) (150,000) CC Release - ------------------------------------------------------------------------------- Less: Tax on Senior (3,336,598) (3,336,598) Living Spin Off - ------------------------------------------------------------------------------- Less: Smith Barney (221,642) (221,642) Fee - ------------------------------------------------------------------------------- Less: Payments in (500,000) (500,000) Excess of $200,000 related to Senior Living Transaction - ------------------------------------------------------------------------------- Net Redemption 69,849,060 11,941,759 81,790,819 Price - ------------------------------------------------------------------------------- Cash to GECC 25,622,543 4,380,563 30,003,106 - ------------------------------------------------------------------------------- Cash to Redeemed Preferred Shareholders(1) $44,226,517 $ 7,561,196 $51,787,713 - -------------------------------------------------------------------------------
- ---------- (1) Approximately $1.7 million of this amount will remain with the Company after netting the option exercise price under the Accelerated Options and/or Purchased Options against the price per share due to the holders of the Redeemed Preferred Stock. 10 11 1.08. Estimated Senior Living Tax Liability. The Company and Purchaser acknowledge and agree that the cash proceeds distributed to the holders of the Redeemed Preferred Stock has been calculated based on the agreement of the Company's and the Purchaser's independent certified public accountants that it is anticipated that the Company will incur a state and federal tax liability in the aggregate amount of $3,336,598 (determined based on the Company's financial statements as of June 30, 1996) in conjunction with the Senior Living Transaction, which liability will be due and payable in 1997 (the "Estimated Senior Living Tax Liability"). Purchaser will cause the Company to prepare the Company's state and federal tax returns for calendar year 1996 (the "1996 Tax Returns") and upon the completion thereof shall be liable for the payment of such taxes whether the same are more or less than the estimated Senior Living Tax Liability and from and after the Closing Date none of the holders of GECC Preferred Stock and Redeemable Preferred Stock, the Carryover Shareholders or the purchasers in the Senior Living Transaction shall have any liability therefor. In addition, the Purchaser acknowledges and agrees that the Company shall be liable for any and all state and federal income taxes which are due and payable after Closing or which were due and not paid in full prior to the Closing Date and which, in either event, relate to periods prior to the Closing Date with respect to the business which is the subject of the Senior Living Transaction and that there shall be no adjustment to the amount of the Investment Proceeds due pursuant to Paragraph 1.04(b) or the redemption price provided for in Paragraph 1.06 as a result thereof. Notwithstanding the foregoing, in the event (i) the actual Senior Living Tax Liability is less than the Estimated Senior Living Tax Liability or (ii) the Company receives a tax refund with respect to the Senior Living Tax Liability actually paid by it, in either instance, solely as a result of a deemed reduction in the purchase price paid with respect to the Senior Living Transaction arising from a claim against any escrow accounts established at the closing thereof as security for the indemnity obligations of the Company under the Purchase or Merger Agreements executed pursuant thereto and the remittance of funds in said escrow to the purchaser(s) in the Senior Living Transaction, 64.15% of the amount of such tax savings or tax refund shall be remitted by the Company to the former holders of the Redeemed Preferred Stock and 35.85% of the amount thereof shall be remitted by the Company to the former holder of the GECC Preferred Stock. The Company and Purchaser agree that at or immediately prior to Closing they shall review and agree upon any necessary adjustments to the amount of the estimated Senior Living Tax Liability reflected in this Paragraph 1.08 based on the financial statements of the Company prepared as of the Closing Date. 1.09. GECE Payment. The Company and the Purchaser acknowledge and agree that the cash proceeds distributed to the holders of the Redeemed Preferred Stock shall be net of a One Hundred Fifty Thousand and no/100 Dollar ($150,000) payment which is due to General Electric Credit Equities in connection with the Senior Living Transaction (the "GECE Payment") and which shall be paid to GECE concurrently with the closing of the Senior Living Transaction in the manner agree upon by the Company and GECE. 11 12 ARTICLE II CLOSING 2.01. Deliveries by the Company at Closing. In the event all of the conditions to Closing (as defined below) set forth in Paragraphs 8.01 and 8.02 have been satisfied or waived, the Company shall deliver all certificates, documents, exhibits, schedules, and other instruments required to be delivered at Closing by the Company or its counsel pursuant to this Agreement, each of which shall be fully executed and completed, as appropriate. 2.02. Deliveries by Purchaser at Closing. In the event all of the conditions to Closing (as defined below) set forth in Paragraphs 8.01 and 8.02 have been satisfied or waived, Purchaser shall deliver and/or cause its designees to deliver all of the certificates, documents, exhibits, schedules, and other instruments required to be delivered at Closing by Purchaser and/or its designees or its or their counsel, pursuant to this Agreement, each of which shall be fully executed and completed, as appropriate and shall remit or cause (pursuant to the terms of the instructions under which the same was delivered into escrow prior to the consummation of the Carryco Merger) to be remitted to the Company the consideration described in Paragraph 1.04. 2.03. Time and Place. The closing (the "Closing") of the Transactions contemplated by this Agreement shall occur at the Chicago offices of Kirkland & Ellis at 10:00 am, local time, on December 13, 1996, provided that as of said date all of the conditions to Closing set forth in Paragraphs 8.01 and 8.02 have been satisfied by the responsible party or waived by the party benefitted thereby and thus entitled to waive the same (the "Closing Date"), or at such other time or on such other date or at such other place as the Company and Purchaser may mutually agree, but in no event later than December 17, 1996 (the "Outside Closing Date"). In the event all of the conditions to Closing have not been satisfied or waived as of the Outside Closing Date, either party shall thereafter have the right to terminate this Agreement in accordance with the terms of Article IX hereof. ARTICLE III THE COMPANY'S REPRESENTATIONS AND WARRANTIES Except as otherwise provided in that letter of even date herewith delivered by the Company to Purchaser concurrently with the execution of this Agreement, including any and all appendices thereto and updates thereto authorized by and/or approved by Purchaser in accordance with the terms of Paragraph 10.08 hereof (the "Company Disclosure Letter"), the Company does hereby represent and warrant to Purchaser and to Purchaser's designees who execute a counterpart of this Agreement or a separate certificate pursuant to Paragraph 4.08(f) as follows with respect to the Company and the Subsidiaries (other than the Excluded Subsidiaries (as hereinafter defined) and the business, assets, liabilities and operations thereof, it being understood and agreed that the Company is not making any representations or warranties with respect to the Excluded Subsidiaries or the business, assets, liabilities and operations thereof): 12 13 3.01. Organization and Qualification. (a) The Company is a corporation duly organized and validly existing under the laws of the State of Oregon. Each of the Subsidiaries (as defined in Paragraph 3.01(c) below) is a corporation, partnership or limited liability company, duly organized and validly existing under the laws of the jurisdiction reflected opposite its name in Section 3.01(a) of the Company Disclosure Letter. The Company and each Subsidiary has full corporate or partnership power and authority to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties. (b) The Company and each of the Subsidiaries is duly qualified, licensed or admitted to do business and is in good standing in each jurisdiction in which the ownership, use or leasing of its assets and properties, or the conduct or nature of its business, makes such qualification, licensing or admission necessary. Section 3.01(b) of the Company Disclosure Letter sets forth the foreign jurisdictions in which the Company and each of the Subsidiaries is qualified to do business. (c) Except for those entities disclosed in Part I of Section 3.01(c) of the Company Disclosure Letter (individually, a "Subsidiary" and collectively, the "Subsidiaries"), the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity. For purposes of this Agreement, including, but not limited to, the representations and warranties, covenants and conditions to Closing set forth herein, any and all references to the Subsidiaries of the Company shall specifically exclude those entities disclosed in Part II of Section 3.01(c) of the Company Disclosure Letter (the "Excluded Subsidiaries"), it being understood and agreed that immediately prior to the closing of the Transactions, the Company shall have consummated the Senior Living Transaction and the Excluded Assets Transaction and that in conjunction with the consummation of the Senior Living Transaction and the Excluded Assets Transaction certain stock and partnership interest transfers and/or subsidiary dissolutions may occur concurrently with the closing of the Senior Living Transaction and the Excluded Assets Transaction. 3.02. Capital Stock. (a) As of the date hereof, the authorized capital stock of the Company consists solely of 10 million shares of Common Stock, without par value, and the GECC Preferred Stock which consists of 96,000 shares of Series A Preferred Stock, without par value. The number of issued and outstanding shares of the Common Stock and the holders thereof are listed in Section 3.02(a) of the Company Disclosure Letter (the "Common Stock"). All of the shares of the GECC Preferred Stock are issued and outstanding and are owned by General Electric Capital Corporation. In addition, as of the date hereof, the Company has granted those options to purchase shares of the common stock of the Company listed in Section 3.02(a) of the Company Disclosure Letter to the persons identified therein (the "Options" and together with the Common Stock and the Preferred Stock, the "Shares"). 13 14 Except as set forth in Section 3.02(a) of the Company Disclosure Letter and except as specifically contemplated by Article I of this Agreement, there are no outstanding subscriptions, options, warrants, rights (including "phantom" stock rights), preemptive rights or other contracts, commitments, understandings or arrangements, including any right of conversion or exchange under any outstanding security, instrument or agreement (together, the "Rights"), obligating the Company or any Subsidiary to issue or sell any shares of its capital stock or to grant, extend or enter into any Right with respect thereto nor any voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person other than the Company with respect to the voting of or the right to participate in dividends or other earnings on any capital stock or other equity security of the Company or any of the Subsidiaries. (b) The outstanding shares of Common Stock and GECC Preferred Stock are duly authorized, validly issued, fully paid and nonassessable. (c) Except as set forth in Section 3.02(c) of the Company Disclosure Letter and except for the obligations undertaken by the Company under Article I hereof and under the Preferred Stock Repurchase Agreement, there are no outstanding contractual obligations to which the Company is a party to repurchase, redeem or otherwise acquire any of the Shares. (d) Except as set forth in Section 3.02(d) of the Company Disclosure Letter, there are no outstanding obligations by the Company to provide funds in excess of $100,000 to, or to make any investment (in the form of a loan, capital contribution or otherwise) in excess of $100,000 in, any other person, excluding any of the Subsidiaries. Purchaser acknowledges and agrees that Section 3.02(d) of the Company Disclosure Letter does not include any commitments with respect to equipment purchases or leases, which are described in Section 3.10(b) of the Company Disclosure Letter. (e) The Common Stock and the New Preferred Stock when issued at Closing to Purchaser and/or its designees shall be duly authorized, validly issued, fully paid (assuming the payment of the Investment Proceeds therefor by Purchaser and/or its designee) and non-assessable and shall be issued free and clear of all Liens (as hereinafter defined). 3.03. Authority Relative to this Agreement. The Company has full corporate power and authority to enter into this Agreement and each other instrument, document and agreement necessary to consummate the transactions contemplated hereby, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly approved by the Board of Directors of the company, and no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby, it being understood and agreed that the consummation of the Transactions is subject to the approval of the shareholders of the Company, 14 15 which the Company shall use its best efforts to secure in accordance with the provisions of Paragraph 7.04(a). This Agreement has been duly and validly executed and delivered by the Company and, subject to securing the HSR Approval, the Regulatory Approvals, the Third Party Consents (as each such term is defined in Article VII) and the shareholder approval contemplated by Paragraph 7.04, constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 3.04. Approvals and Consents. Subject to obtaining such consents or making such filings as may be described in Section 3.04 of the Company Disclosure Letter and as may be described in Paragraphs 7.02 and 7.03 of this Agreement, the execution and delivery of this Agreement by the Company does not, and the performance by the Company of its obligations hereunder and the consummation of the transactions contemplated hereby will not: (a) conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any liens, claims, mortgages, encumbrances, pledges, security interests, equities and charges of any kind (each a "Lien") upon any of the assets or properties of the Company or any of the Subsidiaries under, any of the terms, conditions or provisions of: (i) the articles of incorporation or bylaws (or other comparable charter or organizational documents) of the Company or any Subsidiary, (ii) any Company Management Contract (as such.term is defined in Paragraph 3.10(c)), (iii) any Company Lease (as such term is defined in Paragraph 3.10(c)), or (iv) (A) any statute, law, rule, regulation or ordinance (together, "Laws") of any state or of the United States, or any judgment, decree, order or writ (together, "Orders"), of any court, tribunal, arbitrator, authority, agency, commission, official or other instrumentality of the United States or any domestic or foreign state (a "Governmental or Regulatory Authority"), applicable to the Company or any of the Subsidiaries or any of its or their respective assets or properties, or (B) to the knowledge of the Company, any Laws or Orders of any jurisdiction or governmental authority not specified in clause (A), or (C) any Company Contract, as defined in Paragraph 3.10(b), or (D) any Company Permit (as defined in Paragraph 3.09 below). (b) require any consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party under any of the terms, conditions or 15 16 provisions of any Law or Order of any Governmental or Regulatory Authority to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of its or their respective assets or properties is bound; or (c) require any consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party under any of the terms, conditions or provisions of any Company Management Contract, Company Contract or Company Lease to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries or any of its or their assets or properties is bound. 3.05. Financial Statements. (a) The Company has delivered to Purchaser prior to the execution of this Agreement a true and complete copy of the audited consolidated balance sheet of the Company and its consolidated Subsidiaries as of December 31, 1995 (the "1995 Financial Statements") and a true and complete copy of the unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries (after giving effect to the Excluded Assets Transaction and the Senior Living Transaction) as of the six months ended June 30, 1996 (the "June 30, 1996 Financial Statements") and the related statements of operations, stockholders' equity, and cash flows for the fiscal period ended as of each such date, all such audited financial statements with the reports thereon by KPMG Peat Marwick LLP (collectively, the "Company Financial Statements"). (b) The Company Financial Statements were prepared in accordance with GAAP (except as may be indicated therein or in the notes thereto) and fairly present the consolidated financial position of the Company and its consolidated Subsidiaries (after giving effect, in the case of the June 30, 1996 Financial Statements, to the Excluded Assets Transaction and the Senior Living Transaction) as at the respective dates thereof and the consolidated results of their operations and cash flows for the respective periods then ended. (c) The June 30, 1996 financial statements reflect on a Pro Forma basis the consummation of the Senior Living Transaction and the Excluded Assets Transaction. (d) The Company has delivered to Purchaser prior to the execution of this Agreement a true and correct copy of its interim unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries as of July 31, 1996, August 31, 1996 and September 30, 1996 and related statements of operations, stockholder's equity and cash flows for the fiscal periods ended as of each such date (collectively, the "Interim Financial Statements"). The Interim Financial Statements fairly present the consolidated financial position of the Company and its consolidated Subsidiaries (without giving effect to the Excluded Assets Transaction and the Senior Living Transaction) as at the respective periods then ended and were prepared in a manner consistent with the past practices of the Company. 16 17 (e) The Company shall deliver to Purchaser between the date hereof and the Closing Date, a true and correct copy of its interim unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries and related statements of operations, stockholder's equity and cash flows for each month included therein prepared for any periods subsequent to the periods included in the Interim Financial Statements (collectively, the "Subsequent Interim Financial Statements"). The Subsequent Interim Financial Statements will be prepared in a manner so as to fairly present the consolidated financial position of the Company and its consolidated Subsidiaries (without giving effect to the Excluded Assets Transaction and the Senior Living Transaction) as at the respective periods then ended and consistent with the past practices of the Company. 3.06. Absence of Certain Changes or Events. Except as set forth in Section 3.06 of the Company Disclosure Letter or as contemplated by this Agreement, (a) since June 30, 1996 there has not been any change, event or development out of the ordinary course of business having, or that would be reasonably expected to have a continuing, as compared to temporary, adverse effect on the Company and the Subsidiaries, in any one instance of more than $100,000 or in the aggregate of more than $500,000 and (b) except as disclosed in Section 3.06 of the Company Disclosure Letter, (i) between June 30, 1996 and the date hereof each of the Company and the Subsidiaries has conducted its businesses only in the ordinary course and with due regard to the proper maintenance and repair of any real property or personal property owned or leased by it or them and (ii) between June 30, 1996 and the date hereof, neither the Company nor any of the Subsidiaries has engaged in any of the transactions described in Paragraph 5.01(a). Nothing herein shall be construed as requiring the Company to disclose to Purchaser or its designees general changes in the health care industry which may, could or would have an affect on the Company tither prior to or after the Closing, it being understood and agreed that the Purchaser is, and its designees will be, sophisticated investors in and purchasers of health care companies and can and will keep themselves advised as to any such general developments. 3.07. Legal Proceedings. Except as disclosed in Section 3.07 of the Company Disclosure Letter, there are no actions, suits, arbitrations or proceedings pending or, to the knowledge of the Company, threatened against, relating to or affecting, nor are there any Governmental or Regulatory Authority investigations or audits pending or to the knowledge of the Company threatened against, relating to or affecting, the Company or any of the Subsidiaries or any of its or their assets and properties. For purposes hereof disputes with third party payors over the reimbursement due or paid to the Owned Company Facilities or the Leased Company Facilities shall not be deemed to be a legal proceeding, but should be the subject of the disclosure, if any, set forth under Paragraph 3.16. 3.08. Information Supplied. Any documents to be filed by the Company with any Governmental or Regulatory Authority in connection with this Agreement and the other transactions contemplated hereby will not, on the date it is filed or required to be filed, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by the Company with respect to 17 18 information supplied in writing by or on behalf of Purchaser and/or its designees expressly for inclusion therein. The Company further represents and warrants that no representation or warranty by the Company contained in this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state any material facts required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 3.09. Compliance with Laws and Orders. (a) The Company and each of the Subsidiaries holds all permits, licenses, variances, exemptions, orders and approvals of all Governmental and Regulatory Authorities necessary for the leasing, ownership or operation of the hospitals and other related health care facilities owned (the "Owned Company Facilities") or leased (the "Leased Company Facilities") by the Company and the Subsidiaries and for the lawful conduct of the business of the Company and the Subsidiaries (the "Company Permits") at the Company Facilities (as defined below). A true and correct list of each of the Owned Company Facilities, each hospital and related healthcare facility managed by the Company or its subsidiaries (the "Managed Company Facilities"), the Leased Company Facilities and any other related health care facilities owned, leased or operated by the Company, including, but not limited to, outpatient clinics and medical office buildings, is set forth in Section 3.09 of the Company Disclosure Letter (collectively, the "Company Facilities"). (b) Each of the Company and the Subsidiaries is in substantial compliance with the terms of the Company Permits held by it. Except as disclosed in Section 3.09 of the Company Disclosure Letter, to the knowledge of the Company, the Company and each of the Subsidiaries is in substantial compliance with any Law and in full compliance with any Order of any Governmental or Regulatory Authority applicable to it. For purposes hereof, the Company and the Subsidiaries shall be deemed to be in substantial compliance with the Company Permits and with any Law if its failure to comply therewith is the subject of a plan of correction which has been accepted by the applicable Governmental or Regulatory Authority. 3.10. Compliance with Agreements: Certain Agreements. (a) Except as disclosed in Section 3.10(a) of the Company Disclosure Letter, neither the Company nor any of the Subsidiaries is in breach or violation of, or in default in the performance or observance of any term or provision of, and no event has occurred which, with notice or lapse of time or both, would be reasonably expected to result in a default under: (i) its articles of incorporation or bylaws (or other comparable charter documents); (ii) any Company Management Contract; (iii) any Company Lease; 18 19 (iv) any Company Partnership Agreement (as defined below); or (v) any Company Contract. (b) Except with respect to those agreements listed in Section 3.10(b) of the Company Disclosure Letter, true and correct copies of which have been made available to Purchaser prior to the execution of this Agreement, the receipt of which is hereby acknowledged by Purchaser, or as provided for in this Agreement, to its knowledge, neither the Company nor any of the Subsidiaries is a party to, nor are any of its or their assets bound or affected by, any oral or written agreements of the following nature (the "Company Contracts"): (i) consulting agreement, contract, arrangement or understanding not terminable whether with or without penalty on 90 days' or less notice involving the payment of more than $50,000 per annum individually or $100,000 per annum in the aggregate for all such agreements; (ii) union or collective bargaining agreement; (iii) agreement contract, arrangement, commitment, understanding or obligation with any Key Employee (as hereinafter defined) of the Company or any of the Subsidiaries the benefits of which are contingent or vest, or the terms of which are materially altered, upon the occurrence of a transaction involving the Company of the nature contemplated by this Agreement; (iv) agreement, contract, arrangement, commitment, understanding or obligation with respect to any Key Employee of the Company or any Subsidiary providing any term of employment or compensation guarantee extending for a period longer than 90 days after the date hereof and for the payment of more than $50,000 per annum individually or $100,000 per annum in the aggregate for all such agreements; (v) agreement or plan, including any stock option, stock appreciation right, restricted stock or stock purchase plan, any of the benefits of which will be increased, or the vesting of the benefits of which will be accelerated, by the occurrence of any of the transactions contemplated by this Agreement or the value of any of the benefits of which will be calculated on the basis of any of the transactions contemplated by this Agreement; (vi) agreement, contract, arrangement, commitment, understanding or obligation to which it is a party limiting in any material respect its freedom or the freedom of any Key Employee to compete in any line of business with any person; (v) agreement, contract, arrangement, commitment, understanding or obligation (i) evidencing any liability (A) in excess of $100,000, or (B) any liability for the obligations of any person in excess of $100,000 or (C) regardless of the amount thereof, that is not to be fully performed or that cannot be terminated whether with or without penalty within ninety (90) days after 19 20 the Closing Date or (ii) defining the terms on which any other debt in excess of $100,000 has been or may be issued or incurred; provided, however, that for purposes of this Paragraph 3.l0(a)(vii), an accrual or third party contractual allowance reflected on the Company Financial Statements shall not be deemed to be a liability subject to disclosure under the terms hereof; or (viii) agreement, contract, arrangement, commitment, understanding or obligation relating to it, its present or prospective business, operations, properties or assets in which any Key Employee has any interest, direct or indirect, including a description of any transactions between it and any Key Employee or any entity in which any Key Employee has any interest (other than transactions between any corporation and a publicly held corporation in which the Key Employee holds less than five percent (5%) of the issued and outstanding shares of capital stock). (c) For purposes of this Agreement the following defined terms used in this Paragraph and elsewhere in this Agreement shall have the meanings set forth below: (i) "Company Management Contract" means any agreement to which the Company or any Subsidiary is a party providing for management, administrative or other services to be rendered in connection with the operation, administration, or supervision of any managed Company Facility, which contracts include as of the date of this Agreement, those Company Management Contracts listed in Section 3.l0(c) of the Company Disclosure Letter, true and correct copies of which have been made available to Purchaser prior to the execution of this Agreement the receipt of which is hereby acknowledged by Purchaser. (ii) "Company Lease" means those leases to which the Company or any Subsidiary is a party with respect to those hospitals and other related health care facilities listed in Section 3.10(c) of the Company Disclosure Letter, true and correct copies of which have been made available to Purchaser prior to the execution of this Agreement, the receipt of which is hereby acknowledged by Purchaser. (iii) "Company Partnership Agreement" means those partnership agreements in which the Company or any Subsidiary holds a general and/or limited partnership interest listed in Section 3.10(c) of the Company Disclosure Letter, true and correct copies of which have been made available to Purchaser prior to the execution of this Agreement, the receipt of which is hereby acknowledged by Purchaser. (iv) "Key Employee" means all officers, managers and other employees and consultants of the Company or any Subsidiary whose current annual salary or rate of compensation (including bonus and incentive compensation) is $100,000 or more, as set forth more fully in Section 3.10(c) of the Company Disclosure Letter. 3.11. Taxes. The Company has filed all tax returns which are required to have been filed in any jurisdiction with respect to the Company and each of the Subsidiaries, and has paid, before 20 21 they have become delinquent, all taxes shown to be due and payable on such returns and, to the knowledge of the Company, all other taxes and assessments payable by the Company on behalf of itself or any of the Subsidiaries, to the extent the same have become due and payable, except for any taxes and assessments the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company has set aside on its books reserves to the extent required by, and segregated in accordance with, GAAP. Except as set forth in Section 3.11 of the Company Disclosure Letter, (i) the Company has no knowledge of any proposed material tax assessment against the Company or any of the Subsidiaries. (ii) to the knowledge of the Company all tax liabilities of the Company and the Subsidiaries are adequately provided for on the books of the Company and (iii) to the knowledge of the Company all of the tax returns previously filed by the Company and which, as of the date hereof, have not been audited by the applicable Governmental or Regulatory Authority having jurisdiction thereof, were true and correct in all material respects at the time filed by the Company. The Company has not received any notice of any past due or unpaid tax or assessment which as of the date hereof has not either been paid or is being contested in good faith by appropriate proceedings and with respect to which the Company has set aside on its books reserves to the extent required by, and segregated in accordance with, GAAP. 3.12. Employee Benefit Plans: ERISA. (a) Section 3.12 of the Company Disclosure Letter sets forth a list of all of the bonus, deferred and incentive compensation, profit sharing, retirement, vacation, sick leave, leave of absence, hospitalization, severance and fringe benefit plans, all "employee pension benefit plans" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all "employee welfare benefit plans" (as defined in Section 3(1) of ERISA) which the Company maintains, to which the Company contributes or has an obligation to contribute, or with respect to which the Company has any liability or reasonable expectation of liability, whether or not any such plan has terminated and whether or not any such plan is or was maintained or contributed to by any current or former member of the Company's Controlled Group (within the meaning of Section 414 of the IRC) (the "Plans"). (b) With respect to each of the Plans, the Company further represents and warrants as follows: (i) None of the Plans (A) is subject to Title IV of ERISA or the minimum funding requirements of Section 412 of the Internal Revenue Code of 1986, as amended (the "IRC") or Section 302 of ERISA, (B) is a plan of the type described in Section 4063 of ERISA or Section 413(c) of the IRC, (C) is a "multi employer plan" (as defined in Section 3(37) of ERISA) or (D) provides for medical or life insurance benefits to current or future retired or former employees of the Company (other than as required under IRC Section 4980B or applicable state law). 21 22 (ii) Each Plan is, in all material respects, in compliance, and has been administered, maintained and funded in all material respects in accordance with the applicable provisions of ERISA and the IRC and all other applicable laws, rules and regulations, including, but not limited to, medical continuation under IRC Section 4980B. None of the Company, any Controlled Group member, any fiduciary or, to the knowledge of the Company, any other person has, with respect to any Plan, (A) engaged in any transaction prohibited by ERISA, the IRC or other applicable law; (B) breached any fiduciary duty owed by it; or (C) failed to file and distribute timely and properly all reports and information required to be filed or distributed in accordance with ERISA or the IRC. (iii) All contributions, premiums or payments which are due on or before the Closing Date with respect to the Plans have been timely, or will have been prior to the Closing Date, paid. (iv) Each Plan which is intended to be qualified under Section 401(a) of the IRC (A) has been timely amended to reflect all requirements of the Tax Reform Act of 1986 ("TRA 86") and all subsequent legislation which is required to be adopted prior to the end of the TRA 86 remedial amendment period and (B) has received from the Internal Revenue Service a favorable determination letter which considers the terms of the Plan as amended for such tax law changes. To the best knowledge of the Company, nothing has occurred since the date of such letter that could adversely affect the qualified status of such Plan or the tax-exempt status of any related trust. (v) No under funded defined benefit plan has been, during the five years preceding the Closing Date, transferred out of the Company's Controlled Group. (vi) Except as set forth in Section 3.12 of the Company Disclosure Letter, the Company has not incurred, and has no reason to expect that it will incur, any material liability to the Internal Revenue Service, the Department of Labor, the Pension Benefit Guaranty Corporation, any multi employer plan or otherwise under Title IV of ERISA (including any withdrawal liability) or under the IRC with respect to any Plan or any other plan that the Company or any member of its Controlled Group maintains or ever has maintained or to which any of them contributes, ever has contributed, or ever has been required to contribute. (vii) Purchaser acknowledges and agrees that the Company has made available to Purchaser a copy of each Plan and the Company represents and warrants that each Plan so provided was a true, complete and correct copy, to the extent applicable, of (A) all documents pursuant to which the Plans are maintained, funded and administered, (B) the three most recent annual reports (Form 5500 series) filed with the Internal Revenue Service (with attachments), (C) the three most recent financial statements, and (D) all governmental rulings, determinations, and opinions (and pending requests for governmental rulings, determination, and opinions). 22 23 (c) Nothing in this Paragraph 3.12 shall be construed as a representation or warranty by the Company with respect to any liability which the Company or Purchaser may incur under any or all of the Plans as a result of the acts or omissions of the Company or Purchaser in connection with the Plans after the Closing. 3.13. Labor Matters. Except as set forth in Section 3.13 of the Company Disclosure Letter, no unfair labor practice complaint for sex, age, race or other discrimination claim has been brought against the Company or any of the Subsidiaries in connection with its or their business before the National Labor Relations Board, the Equal Employment Opportunity Commission or any other Governmental Body during the three-year period ending as of the Closing Date nor has the Company or any of the Subsidiaries received written notice of the intention of any person to file any such claim which remains unresolved as of the date hereof. 3.14. Environmental Matters. (a) Except as disclosed in Section 3.14 of the Company Disclosure Letter, which section contains all of the Phase I Assessments of the Leased Facilities which were prepared by or at the direction of the Company prior to the date thereof and which section Purchaser acknowledges and agrees contains all of the Phase I Assessments of the Leased Facilities which were prepared by or at the direction of Purchaser: (i) the Company complies with all applicable Environmental Laws and possesses and complies with all applicable Environmental Permits required under such laws to operate as it presently operates; (ii) to the knowledge of the Company, no events are likely to occur between the date hereof and the Closing Date at any of the Owned Company Facilities or Leased Company Facilities that would prevent compliance with, or materially increase the burden on the Company of complying with, applicable Environmental Laws or Environmental Permits required under such laws; (iii) there are no Materials of Environmental Concern in conditions and concentrations at any of the Owned Company Facilities or Leased Company Facilities, that are reasonably expected to give rise prior to Closing to liability of the Company under any Environmental Law; and (iv) the Company has not received any written notification alleging that it is liable for, or request for information pursuant to Section 104(e) of the Comprehensive Environmental Response, Compensation and Liability Act concerning, disposal of Materials of Environmental Concern at any location. (b) For purposes of this Agreement the following defined terms used in this Paragraph and elsewhere in this Agreement shall have the meanings set forth below: (i) "Environmental Laws" shall mean all Federal, state, or local statutes, regulations, ordinances, codes, or decrees protecting the quality of the ambient air, soil, surface water or groundwater, in effect as of or, to the extent applicable, at any time prior to, the date of this Agreement. 23 24 (ii) "Environmental Permits" shall mean all permits, licenses, registrations, and other authorizations required under applicable Environmental Laws. (iii) "Environmental Report" shall mean any report, study, assessment, audit, or other similar document that addresses any issue of noncompliance with, or liability under, any Environmental Law that may affect the Company. (iv) "Materials of Environmental Concern" shall mean any hazardous, acutely hazardous, or toxic substance or waste defined and regulated as such under the Environmental Laws, including without limitation the federal Comprehensive Environmental Response. Compensation and Liability Act and the federal Resource Conservation and Recovery Act. (c) Nothing in this Paragraph 3.14 shall be construed as a representation or warranty by the Company with respect to any liability which the Company or Purchaser may incur under the Environmental Laws or any costs which the Company or Purchaser may incur in complying with the Environmental Laws as a result of either (i) changes in the Environmental Laws after the Closing Date or(ii) the acts or omissions of the Company or Purchaser after the Closing Date, including, but not limited to, any acts which result in the release of Materials of Environmental Concern which may be present at any of the Leased Company Facilities or Owned Company Facilities as of the date hereof but which, as of the date hereof, are in a condition or quantity which do not require the Company to secure any Environmental Permits or to take any other action to be in compliance with the Environmental Laws with respect thereto. 3.15. Brokers or Finders. The Company represents that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, other than Smith Barney, which has acted as a financial advisor to the Company with respect to the Transactions and which shall be compensated by the Company at Closing for its services rendered in connection therewith. The Company further represents and warrants that the fee due to Smith Barney shall be based on the total consideration paid to the Company pursuant to this Investment Agreement and any documents executed in connection with the Senior Living Transaction and that, although the Company shall be required to pay in its entirety the fee due to Smith Barney, the Company shall only be economically responsible for the portion of the fee allocated to the Transactions which are the subject of this Agreement, it being understood and agreed that the portion of the fee allocable to the Senior Living Transaction (the "Senior Living Smith Barney Fee") shall effectively be paid by the shareholders of the Company in that the same is included in the Purchase Price Adjustments and accordingly shall be deducted from the proceeds to which they are otherwise entitled prior to the distribution thereof in accordance with Article I. The Company acknowledges and agrees that a breach of its obligations under this Paragraph 3.15 shall survive the Closing. 24 25 3.16. Cost Reports. The Company and each Subsidiary has duly and timely filed all cost reports which are required as of the date hereof to be filed by it in connection with the operation of the Company Facilities. A true and correct list of all such cost reports which have been filed by the Company and each Subsidiary and provided to Purchaser as of the date hereof is set forth in Section 3.16 of the Company Disclosure Letter, the receipt of which cost reports is hereby acknowledged by Purchaser. To the knowledge of the Company, all of such cost reports are true, correct and complete in all material respects and, except as set forth in Section 3.16 of the Company Disclosure Letter have been prepared in all material respects in accordance with the requirements of the Medicare and/or Medicaid Act, as applicable. Nothing herein shall be construed as a representation or warranty by the Company with respect to the filing of the cost reports with respect to the Managed Company Facilities. 3.17. Tangible Property and Assets. (a) The Company and the Subsidiaries have good and marketable title to, or have valid fee simple title or leasehold interests in, as applicable, or valid rights under contract to use, all tangible property and assets owned and/or used in and, individually or in the aggregate, material to the conduct of its or their businesses (including all tangible property and assets reflected on the latest audited balance sheet included in the Company Financial Statements, other than property or assets disposed of since such date or held subject to a lease or other contract permitted to expire in accordance with its terms since such date, in either case in the ordinary course of business,) which property and assets include the Company's corporate office building located in Portland, Oregon, which the Company represents and warrants is the only real property owned by it as of the date here of (the "Tangible Property and Assets"). (b) The Company's title to the Tangible Property and Assets described in clause (a) is free and clear of all Liens other than (i) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is nor yet due or delinquent and (ii) any imperfection of title or similar Lien which individually or in the aggregate with other such Liens does not materially impair the value of the property or asset subject to such Lien or the use of such property or asset in the conduct of the business of the Company and the Subsidiaries taken as a whole and (iii) any Lien which shall be satisfied and released of record as of the Closing Date. All such property and assets are, in all material respects, in good working order and condition, ordinary wear and tear excepted, and, to the knowledge of the Company, adequate and suitable for the purposes for which they are presently being used. (c) On the date hereof and on the Closing Date, the inventory and consumable supplies located at and used in connection with the operation of the Leased Company Facilities are and shall be in a good and useable condition and sufficient in quantity and quality to operate such Leased Company Facilities in a manner consistent with the past practices of the Company. 25 26 (d) Neither the Company nor any of the Subsidiaries has received notice of any pending or threatened condemnation or taking by power of eminent domain or otherwise of any of the Tangible Assets or Property or, with respect to the Company's corporate office, any notice of any tax or special lien or assessment which would not be paid in full by the Closing Date. (e) Except as set forth in Section 3.17(e) of the Company Disclosure Letter, neither the Company nor any of the Subsidiaries has notice that any of the Tangible Assets or Property is not in compliance with applicable building or zoning codes and ordinances. 3.18. Certification and Accreditation. Except as otherwise set forth in Section 3.l8 of the Company Disclosure Letter, the Leased Company Facilities are certified to participate in Medicare and/or Medicaid and are duly accredited by the Joint Commission on Accreditation of Healthcare Organizations, subject to no contingencies other than those set forth in the correspondence described in Section 3.18 of the Company Disclosure Letter. Purchaser acknowledges and agrees that it has been provided with copies of the correspondence described in Section 3.18 of the Company Disclosure Letter and the Company represents and warrants that it provided Purchaser with true and correct copies of the correspondence described in Section 3.18 of the Company Disclosure Letter. Nothing herein shall be construed as a representation or warranty by the Company with respect to the certification or accreditation of the Managed Company Facilities, which certification and accreditation is in the name of the owner of such Managed Company Facilities and not in the name of the Company. As of the date hereof, the Company has not received any written or verbal notice of any action, investigation or other proceeding which has not been resolved as of the date hereof to revoke, terminate or not renew any such certification or accreditation with respect to the Leased Company Facilities. 3.19. Insurance. Section 3.19 of the Company Disclosure Letter sets forth the insurance policies covering the Company's operations with respect to the Leased Company Facilities and the Managed Company Facilities in effect as of the date hereof, including the policy numbers, terms, identity of the insurers and amounts and nature of coverage. All of such policies are now and will be until Closing in full force and effect, with no premium arrearages. Purchaser acknowledges and agrees that copies of all such policies and any endorsements thereto with respect to the Leased Company Facilities and copies of any endorsements with respect to the Managed Company Facilities have been made available to Purchaser prior to the date hereof and the Company represents and warrants that all such policies and endorsements made available to Purchaser were true and correct. 3.20. Payments. Neither the Company nor any of the Subsidiaries has, directly or indirectly, paid or delivered or agreed to pay or deliver any fee, commission, or other sum of money or item or property, however, characterized, to any person, government official or other party related to the businesses of the Leased Company Facilities or the Managed Company Facilities which was, at the time paid or delivered, illegal under any applicable federal, state or local law. 26 27 3.21. Intellectual Property. (a) Neither the Company nor any of the Subsidiaries has received protection under federal or state law of any trademarks, trade names, logos, service marks, patents, patent rights, assumed names, trade secrets or copyrights used by them in their business. (b) The Company has filed a service mark application with the United States Patent and Trade Mark Office for the logo utilized by the Nurse Call Center operated by the Health Direct Program, and has filed a trademark application with the United States Patent and Trademark Office for the "HealthDirect" trademark but has not received any final determinations as of the date hereof with respect to either such service mark or trademark filings. (c) The Company has implemented, and is actively engaged in, a program designed to monitor the compliance at the corporate office of the Company with applicable laws governing the licensure of the computer hardware and software used by them in their businesses. Such a compliance program has not yet been implemented at the Leased Facilities and is not anticipated to be implemented at the Managed Facilities. Nothing herein shall be construed as a representation or warranty by the Company that the use by the Company and the Subsidiaries is in full compliance with all applicable hardware and software licensure laws and/or that the trademarks, trade names, logos, service marks, patents, patent rights, assumed names, trade secrets or copyrights used by the Company do not infringe on or violate the rights of any third parties; provided, however, that the Company does hereby represent and warrant that, except as set forth in Section 3.21 of the Company Disclosure Letter with respect to certain copyright violations which have been corrected as of the date hereof, it has not received notice of, nor does it have actual knowledge of, any such infringement or claimed infringement. ARTICLE IV PURCHASER'S AND PRINCIPAL'S REPRESENTATIONS AND WARRANTIES Purchaser hereby represents and warrants to the Company and to the Carryover Shareholders as follows: 4.01. Organization. Purchaser is a limited partnership organized and in good standing under the laws of the State of Delaware. 4.02. Authority Relative to this Agreement. Purchaser has full power and authority to enter into this Agreement and each other instrument, document and agreement necessary to consummate the transactions contemplated hereby, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by Purchaser and the consummation by Purchaser of the transactions contemplated hereby have been duly and validly approved by Purchaser, and no other proceedings on the part of Purchaser or its 27 28 general or limited partners are necessary to authorize the execution, delivery and performance of this Agreement by Purchaser and the consummation by Purchaser of the Transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Purchaser and, subject to obtaining the HSR Approval, the Third Party Consents and Regulatory Approvals described in Paragraphs 7.02 and 7.03, constitutes a legal, valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 4.03. Approvals and Consents. Subject to obtaining the HSR Approval, and the Third Party Consents and Regulatory Approvals described in Paragraphs 7.02 and 7.03, the execution and delivery of this Agreement by Purchaser does not, and the performance by Purchaser of its obligations hereunder and the consummation of the transactions contemplated hereby will not: (a) conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or result in the creation or imposition of any Lien upon any of the assets or properties of Purchaser under any of the terms, conditions or provisions of: (i) the organizational documents of Purchaser; (ii) any material contract or agreement to which Purchaser is a party or by which the assets of Purchaser may be bound or affected; or (iii) (A) any Laws of any state or of the United States or Orders of any court, tribunal, arbitrator or Governmental or Regulatory Authority, applicable to Purchaser or any of its assets or properties, (B) to the knowledge of Purchaser, any Laws or Orders of any jurisdiction or governmental authority not specified in clause (A), or (C) any contracts to which Purchaser is a party or by which Purchaser or any of its assets or properties is bound. (b) require any consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party under any of the terms, conditions or provisions of any Law or Order of any Governmental or Regulatory Authority to which Purchaser or any of the Purchasers' Subsidiaries is a party or by which Purchaser or any of its assets or properties is bound; or (c) require any consent, approval or action of, filing with or notice to any Governmental or Regulatory Authority or other public or private third party. 28 29 4.04. Information Supplied. Any documents to be filed by Purchaser with any Governmental or Regulatory Authority in connection with this Agreement and the other transactions contemplated hereby will not, on the date it is filed or required to be filed, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by Purchaser with respect to information supplied in writing by or on behalf of the Company or the Subsidiaries expressly for inclusion therein. Purchaser further represents and warrants that no representation or warranty by Purchaser contained in this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state any material facts required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 4.05. Brokers or Finders. Purchaser represents that no agent, broker, investment banker, financial advisor or other firm or person has been engaged by it and is or will be entitled to any broker's or finder's fee or any other commission or similar fee from it in connection with any of the Transactions contemplated by this Agreement. 4.06. Financing. Purchaser will provide the Company with any and all documents evidencing, securing or otherwise executed in connection with the Investment and the Credit Facility (the "Financing Transactions"). Both prior to and after the execution of the documents evidencing the Financing Transactions, Purchaser will further provide the Company, upon request, with periodic updates with respect to the status of such Financing Transactions. As of the date hereof, Purchaser has no actual knowledge of any facts or circumstances which would prevent the Financing Transactions from being consummated on or prior to the Outside Closing Date with the exception of the consents which may be required under the Credit Facility from the landlords of the Leased Company Facilities. 4.07. Due Diligence. Purchaser and its agents have had such access to the Company and the Subsidiaries and the books, records and facilities thereof as they deemed to be necessary to conduct a due diligence investigation with respect to the Company and the Subsidiaries in order to enter into this Agreement and to carry out the Transactions provided for herein. As of the date hereof, Purchaser and its agents do not have actual knowledge of any facts or circumstances with respect to the Company or any of the Subsidiaries which would prevent them from consummating the Transactions on the terms and conditions provided for herein, including, but not limited to, for the Investment Proceeds provided for in Paragraph 1.04(b). 4.08. Investment Representations. (a) The terms of the Investment provided for in Paragraph 1.04 have been independently negotiated between the parties hereto and all the various terms and provisions of this Agreement and all exhibits and schedules hereto have been agreed to by Purchaser based upon its own deliberations, judgements and business experience, independent of any material statement, whether or fact or 29 30 opinion, by the Company or its officers, directors, agents or employees, other than the representations, warranties and covenants of the Company and the Subsidiaries set forth in this Investment Agreement. (b) Purchaser is making the Investment for investment purposes only and not with the intent to resell the same. The Company has disclosed to such Purchaser that the common stock and the New Preferred Stock being acquired by Purchaser and/or by Purchaser's designees, has not been registered under the Securities Act of 1933, as amended, or in any state in which it may be offered for sale. (c) Purchaser is an "accredited investor", as defined by Rule 501 promulgated under the Securities Act of 1933, as amended. (d) Purchaser has, or prior to Closing will have, been furnished with sufficient written information about the Company and the Subsidiaries and their respective assets and liabilities to allow such Purchaser to make an informed investment decisions prior to his or its investment. (e) Purchaser's investment is not being made for the purpose of speculating in securities. (f) In the event of an assignment by Purchaser of any or all of its rights and obligations hereunder with respect to the Investment, Purchaser will cause its designees to either execute a counterpart of this Investment Agreement or a separate certificate, which in either event confirms on behalf of each such designee of the truth as applied to such designee of the representations and warranties set forth in this Paragraph 4.08. Principal hereby represents and warrants to the Company and to the Carryover Shareholders as follows: 4.01A. Financing. Principal will provide the Company with any and all documents concerning the Financing Transactions as and when executed. Both prior to and after the execution of the documents evidencing the Financing Transactions, Principal will further provide the Company, upon request, with periodic updates with respect to the status of such Financing Transactions. Principal has paid any and all commitment fees required as of the date hereof for the lenders to proceed with the Financing Transactions. As of the date hereof, Principal has no actual knowledge of any facts or circumstances which would prevent the Financing Transactions from being consummated on or prior to the Outside Closing Date with the exception of the consents which may be required under the Credit Facility from the landlords of the Leased Company Facilities. 4.02A. Due Diligence. Principal and its agents have had such access to the Company and the Subsidiaries and the books, records and facilities thereof as they deemed to be necessary to conduct a due diligence investigation with respect to the Company and the Subsidiaries in order to enter into this Agreement and to carry out the Transactions provided for herein. As of the date hereof, 30 31 Principal and its agents do not have actual knowledge of any facts or circumstances with respect to the Company or any of the Subsidiaries which would prevent the Transactions from being consummated on the terms and conditions provided for herein, including, but not limited to, for the amount of the Investment Proceeds provided for in Paragraph 1.04(b). ARTICLE V COMPANY COVENANTS 5.01. Pre Closing. The Company covenants that between the date hereof and the Closing: (a) Except as contemplated by this Agreement (including the Company Disclosure Letter) or with the consent of either Purchaser or Principal, which consent shall not be unreasonably withheld, conditioned or delayed and which approval shall be deemed to have been given if not denied within four (4) business days after Purchaser's and Principal's receipt of a written approval request from the Company directed to Purchaser and to the Chief Executive Officer or Chief Financial Officer of Principal, the Company or the Subsidiaries, as applicable, will operate the businesses which are the subject of the Transactions only in the ordinary course of business and with due regard to the proper maintenance and repair of any real property or personal property owned or leased by it or them. In furtherance and not in limitation of the foregoing: (i) Neither the Company nor any Subsidiary will make any material change in the operation of the business of, nor, except in the ordinary course of the business of owning and/or operating, as applicable, the Company Facilities, sell or agree to sell any items of machinery, equipment or other fixed assets of any of the Company Facilities having a value in any one instance of $100,000 or more or having a value of $500,000 or more in the aggregate nor otherwise enter into any agreements affecting any of the Company Facilities having a value in any one instance of $100,000 or more or having a value of $500,000 or more in the aggregate; (ii) Neither the Company nor any Subsidiary will enter into any contract or commitment affecting any of the Company Facilities or the assets or liabilities reflected in the Company Financial Statements except in the ordinary course of business or as otherwise specifically permitted by this Paragraph 5.01 nor, except as specifically contemplated by this Agreement, will the Company or any Subsidiary declare or pay any dividend or other distribution other than distributions in the ordinary course of business from a Subsidiary to the Company or from one Subsidiary to another Subsidiary; provided, however, that nothing herein shall be construed as prohibiting the Company prior to the Closing Date from engaging in any or all of the following activities: (A) selling, transferring or conveying to a newly formed legal entity which it contemplates will be owned by certain of the shareholders of the Company, those assets and liabilities listed in Section 7.01 of the Company Disclosure Letter (the "Excluded Assets") 31 32 for a cash purchase price of $406,500 plus (i) the assumption of that mortgage dated November 20, 1990 executed by Brim Senior Living, Inc. in favor of US National Bank of Oregon and (ii) the assumption of any and all liabilities with respect to the Excluded Assets whether the same relate to the period prior to or after the Closing of the Excluded Assets Transaction, (B) selling, transferring or conveying the assets and/or stock interests described in Exhibit G hereof hereto necessary to consummate the Senior Living Transaction for an aggregate cash purchase price of $18,000,000 plus an amount equal to all Excluded Subsidiary Loans made with the approval of Encore to BSL or MSL prior to or after the date hereof: (C) continuing to advance funds on an intercompany loan basis from the Company to the Subsidiaries, from the Subsidiaries to the Company and from the Company with respect to the Excluded Assets and the Senior Living Transaction (the latter of which is hereinafter defined as the "Excluded Subsidiary Loans"; provided, however, that the Company shall cause the Excluded Subsidiaries to repay at Closing the Excluded Subsidiary Loans and shall provide Purchaser with evidence thereof as required by Paragraph 5.02(j); and provided, further, that the Company shall use the portion of the proceeds of the Senior Living Transaction specifically allocated thereto to repay the Excluded Subsidiary Loans made with respect to BSL, MSL or the Excluded Assets; (D) paying at Closing any intercompany liabilities owing from the Company to the subsidiaries involved in the Senior Living Transaction which intercompany liability as of June 30, 1996 was owing solely to Brim Senior Living, Inc. and was in the amount of $2,198,785.00; (E) converting at Closing the investment of the Company in MSL from a loan to an equity contribution, which investment as of June 30, 1996 was, and on the Closing Date will be, $5,155,264. The Company and Purchaser acknowledge and agree that it is anticipated that additional funds will be advanced by the Company prior to Closing to MSL. The Company covenants and agrees that all of such advances shall be in the form of intercompany loans and not investments and the Company shall cause the same to be repaid at Closing and evidence thereof to be delivered to Purchaser as required by Paragraph 5.02(j); provided, however, that the Company shall use the portion of the proceeds of the Senior Living Transaction specifically allocated thereto to repay the same; (F) distributing to the non-facility based employees of the Company at or immediately prior to Closing the incentive compensation funds reserved on the Company Financial Statements, which reserves as of the Closing Date shall not exceed $793,829; and (G) making severance payments to, and the vesting of matching 401(k) contributions which would not otherwise vest for the benefit of, employees of the Company terminated by 32 33 the Company or by Purchaser prior to or after the Closing Date in conjunction with or as a result of the transaction contemplated herein; provided, however, that all such severance payments shall be in accordance with the Company's severance policy in effect as of the date of the execution of this Agreement or those specific severance agreements described in Section 3.10(b) of the Company Disclosure Letter. (iii) The Company or the Subsidiaries, as applicable, will maintain its and their assets in substantially the same condition as they are in at the date hereof, ordinary wear and tear, insured casualty loss and taking by eminent domain excepted. (iv) The Company will promptly provide the Purchaser with the Subsequent Interim Financial Statements as and when the same are available. For purposes of this Paragraph 5.01(a), the Company and the Subsidiaries shall be deemed to be acting in the ordinary course of business if the act, event or occurrence, including any changes or expenditures which are the subject thereof, are reflected in the Company's 1996 Budget described in Section 5.01(a) of the Company Disclosure Letter, a true and correct copy of which has been provided to Purchaser, the receipt of which is acknowledged by Purchaser. In addition, the execution and/or renewal of any Management Contracts by the Company or any of the Subsidiaries between the date hereof and the Closing Date shall be deemed to be in the ordinary course of the business of the Company and the Subsidiaries and accordingly shall not require the approval of, but shall require reasonable notice to, Purchaser of the execution and delivery of any such Management Contracts; provided, however, that in the event any such Management Contracts contemplate the advance of funds by the Company or any Subsidiary to the owner of the relevant facility or health care entity, whether by loan or capital contribution or otherwise, in excess of $100,000 in any one instance or $500,000 in the aggregate, the approval of Purchaser shall be required in accordance with the terms of this Paragraph 5.01. (b) During normal business hours, the Company will provide Purchaser and its agents and employees with access on twenty-four (24) hours notice to the books and records of the Company and the Subsidiaries provided they do not interfere with the operations of the Company and the Subsidiaries; (c) Subject to the limitations set forth in Paragraph 7.04(a), the Company will use its reasonable efforts to cause all of the conditions to Closing set forth in Paragraphs 8.01 and 8.02 which are within the Company's control to be satisfied prior to the Outside Closing Date and the Company will not take, not permit any Subsidiary to take, any action inconsistent with its or their obligations under this Agreement or which could hinder or delay the consummation of the transactions contemplated by this Agreement or which is intended to cause any representation, warranty or covenant made by the Company in this Agreement or in any certificate, list, exhibit, or other instrument furnished or to be furnished pursuant hereto, or in connection with the transaction contemplated hereby, to be untrue in any material respect as of the Closing Date; 33 34 (d) Except with respect to the Excluded Assets Transaction and the Senior Living Transaction, neither the Company nor any of its officers, directors, advisors or others authorized to act on its behalf shall directly initiate or solicit discussions relating to any alternative acquisition proposal or similar transaction including, without limitation, a merger or other business combination involving the Company and/or the Subsidiaries, or offer to acquire or convey in any manner, directly or indirectly, all or substantially all of the equity interests in, the voting securities of, or the assets of the Company or any of the Subsidiaries; provided, however, that public announcements of the transaction contemplated by this Agreement and responses to inquiries received thereafter shall not be prohibited hereby and that the Company shall not be deemed to be in breach of its obligations hereunder in the event the Board of Directors determines in the exercise of its fiduciary duties that the Company is required to provide information in response to any acquisition or merger proposals or discussions which are initiated by a third party; (e) Except as specifically contemplated herein the Company will not materially amend or permit any Subsidiary to materially, amend its or their Articles of Incorporation or Bylaws; (f) Except with respect to the New Preferred Stock and the Common Stock to be issued to Purchaser and/or its designees pursuant to Paragraph 1.02 and the shares of Redeemable Junior Preferred Stock issued upon the consummation of the Carryco Merger and upon the exercise prior to or at Closing of vested Options, the Company will not issue or cause to be issued any additional shares of the Company's common stock or preferred stock; (g) Neither the Company nor any Subsidiary will agree to do or to cause to be done any of the acts which it has covenanted not to do under this Paragraph 5.01; (h) The Company will use its best efforts to secure professional liability insurance with respect to the services rendered by it to the Managed Company Facilities in such amounts as may be reasonably acceptable to Purchaser, which coverage shall include a prior acts insurance policy for periods prior to the effective date thereof during which no such coverage was in effect; (i) From and after the satisfaction or deemed satisfaction of the condition to Closing set forth in Paragraph 8.01(p), the Company shall not amend or modify in any respect any of the BSL Merger Agreement the Excluded Assets Purchase Agreement, the MSL Purchase Agreement or the LP, Purchase Agreement, (j) The Company shall not waive, nor consent to the waiver by the purchaser under the BSL Merger Agreement, the Excluded Assets Purchase Agreement, the MSL Purchase Agreement or the LP Purchase Agreement, of any third party consents or approvals required as a condition to the Closing thereof nor to a waiver of the condition to Closing set forth in the MSL Purchase Agreement with respect to the execution and delivery of the BNP Loan Amendment Documents (as defined therein). 34 35 Purchaser acknowledges and agrees that nothing in this Paragraph 5.01 shall be construed as granting Purchaser any approval, notice or other rights with respect to the day to day operations of the senior living business of the Company which is the subject of the Senior Living Transaction and the day to day operations of the medical office buildings and home health agency which are the subject of the Excluded Assets Transaction. 5.02. Closing Date. On the Closing Date, the Company will deliver or cause to be delivered to Purchaser the following documents: (a) A certificate of a responsible officer of the Company dated as of the Closing Date, certifying on behalf of the Company in such detail as Purchaser may reasonably specify the fulfillment of the conditions set forth in Paragraphs 8.0 l(a) and (b); (b) Resolutions of the Company's Board of Directors and a vote of the Company's shareholders, certified by the Secretary or Assistant Secretary of the Company, authorizing and approving the Transactions contemplated herein; (c) Certified copies of the Charter or Articles of Incorporation of the Company and of each of the Subsidiaries and Certificates of Legal Existence or Good Standing, as applicable, with respect to the Company and each Subsidiary issued within the 10 days prior to the Closing Date by the Secretary of State (or other authorized official) in each of the States in which the Company and each Subsidiary is organized or qualified to do business as a foreign corporation as set forth more fully in Section 3.01 of the Company Disclosure Letter; (d) True and correct copies of the Bylaws of the Company and each Subsidiary certified by the Secretary or Assistant Secretary of each as of the Closing Date; (e) One or more certificates evidencing the shares of Common Stock and the New Preferred Stock issued to Purchaser and/or its designees; (f) An opinion or opinions of counsel to the Company dated as of the Closing Date in form and substance reasonably acceptable to Purchaser; (g) Employment Agreements with Messrs. John R. Miller, Steven P. Taylor and A. E. Brim in the forms attached hereto as Exhibits H duly executed by each of Messrs. Miller, Taylor and Brim (the "Employment Agreements"); (h) The resignations of the members of the Board of Directors and those officers of the Company and certain of its Subsidiaries listed in Exhibit I; (i) Evidence that all of the Excluded Subsidiary Loans have been paid in full; and 35 36 (j) Copies of all third party and governmental consents and approvals (including, without limitation, all blue sky law filings, approvals and/or exemption letters) obtained in connection with the consummation of the transactions hereunder. (k) Copies of any and all documents executed and delivered at the closing of the Senior Living Transaction and the Excluded Asset Transaction, including, but not limited to, bills of sale or cross receipts evidencing the consummation thereof. 5.03. Post Closing: From and after the Closing Date, the Company covenants and agrees as follows: (a) Unless the Board of Directors or the officers of the Company, as applicable, determines that other action is in the best interest of the shareholders of the Company, considered as a whole, the Company shall not take action to reduce the labor force of the Company beyond those actions reasonably deemed necessary to enable the Company to operate efficiently and at a level of profitability consistent with the Company's long range objectives. (b) The Company shall develop a stock option, stock purchase or other similar equity program and shall consider for participation therein certain Company key employees who continue to work for the Company after the Closing Date. (c) For a period of three (3) years after the Closing, the Company shall maintain offices in Portland, Oregon and shall conduct therefrom the management of the hospitals managed by Brim Healthcare, Inc. as of the Closing Date. (d) Unless the Board of Directors determines that other action is in the best interests of the shareholders of the Company, considered as a whole, the Company shall request that certain of the current officers of the Company and the Subsidiaries, identified in Exhibit J hereto, continue to serve for a period of three (3) years after the Closing Date, subject to (A) the Company's right (i) to remove any or all of such officers for cause, (ii) to remove any or all of such officers without cause, in which instance the Company shall provide severance to any such removed officers through the period ending one year from the date of severance and (iii) to replace any of such officers who elect to resign at Closing or thereafter and (B) such officer's right to resign at any time. (e) For a period of not less than three years after the Closing, the Company shall (A) cause the Company's 401(K) Plan and Supplemental Retirement Plan to remain in effect or shall make available to the employees of the Company alternative benefit plans that offer no less favorable benefits than those currently provided to the employees of the Company and the Subsidiaries under such 401 (K) and Supplement Retirement Plans and (B) provide healthcare benefits to the employees of Brim, Inc. and Brim Healthcare, Inc. (or the successors thereto in the event of a merger or liquidation of either or both such entities after Closing) substantially comparable to the benefits 36 37 provided as of the date of this Investment Agreement, subject to the right of the Company to provide such benefits through a managed care, rather than an indemnity, plan. (f) Unless the Board of Directors determines that other action is in the best interests of the shareholders of the Company, considered as a whole, the Company shall maintain employee benefits substantially comparable to the benefits provided to the Company's employees as of the Closing Date; provided, however, that the provisions of this Paragraph 5.03(f) shall not affect or limit the Company's obligations under Paragraph 5.03(e), (g) The Company shall pay as and when due under the terms of the Company`s emplovee benefit plans in effect on the Closing Date, any severance payments due to the employees of the Company (other than the officers listed in Exhibit J whose severance payments shall be as specified in Paragraph 5.03(d)) who are given notice of termination by the Company on or within ninety (90) days after the Closing Date. (h) The Company shall purchase as of the Closing Date and shall keep continuously in effect thereafter for a period of no less than three (3) years a tail insurance policy from the carrier providing the Company's directors and officers liability insurance as of the Closing Date with limits in an amount equal to limits provided for in the Company's directors and officers liability insurance as of the Closing Date and providing coverage with respect to claims which are covered by the Company's directors or officers liability insurance as of the Closing Date and which are brought during such three year period after the Closing Date against the persons who were officers and directors of the Company on or prior to the Closing Date. (i) The Company shall not amend or otherwise modify its Articles of Incorporation or Bylaws in any manner which would reduce or eliminate the indemnity obligations of the Company to the persons who were officers or directors of the Company on or prior to the Closing Date. (i) The Company will indemnify, defend and hold harmless the persons who were officers or directors of the Company on or prior to the Closing Date with respect to their acts or omissions on behalf of the Company prior to the Closing Date to the fullest extent permitted by law. ARTICLE VI PURCHASER'S AND PRINCIPAL'S COVENANTS 6.01. Purchaser; Pre Closing. Purchaser covenants that between the date hereof and the Closing, except as contemplated by this Agreement or with the consent of the Company, which consent shall not be unreasonably withheld, conditioned or delayed and which approval shall be deemed to have been given if not denied within four (4) business days after the Company's receipt of a written approval request from Purchaser directed to the President of the Company: 37 38 (a) Purchaser will use its reasonable efforts to cause all of the conditions to Closing set forth in Paragraphs 8.01 and 8.02, other than the conditions set forth in Paragraph 8.01(a), (b), (e), (f), (g), (h), (i), (k) and (n) and in Paragraph 8.02(e), (f), (g) and (h) which are solely within the Company's control, to be satisfied prior to the Outside Closing Date and Purchaser will not take any action inconsistent with its obligations under this Agreement or which could hinder or delay the consummation of the transactions contemplated by this Agreement or which is intended to cause any representation, warranty, covenant made by Purchaser in this Agreement or in any certificate, list, exhibit, or other instrument furnished or to be furnished pursuant hereto, or in connection with the transaction contemplated hereby, to be untrue in any material respect as of the Closing Date: (b) Purchaser will not agree to do or to cause to be done any of the acts which it has covenanted under this Paragraph 6.01 not to do. (c) Purchaser will proceed with all reasonable diligence to consummate the Financing Transactions in the name of the Company effective as of Closing on the terms reflected in the First Union Commitment Letter and the Investment Commitment Letter. 6.01A. Principal; Pre-Closing. Principal covenants that between the date hereof and the Closing, except with the consent of the Company, which consent may be withheld in the sole discretion of the Company, except as otherwise provided herein: (a) Principal shall not (A) sell or otherwise dispose of all or substantially all of its assets, equity interests or voting securities or (B) directly or indirectly initiate or solicit discussions relating to any acquisition proposal or similar transaction including, without limitation, a merger or other business combination or offer to acquire, directly or indirectly, all or substantially all of the equity interests in, the voting securities of, or the assets of any corporation or other legal entity which owns or operates three hospitals or more, whether by lease, ownership or management contract. Nothing herein shall be construed as prohibiting Principal from pursuing the acquisition or leases of individual acute care hospitals between the date hereof and the Closing Date. Principal shall not be deemed to be in breach of this Paragraph 6.01A(a) in connection with any acquisition discussions, negotiations or proposal engaged in or made by it in response to (i) an "auction" type bid process or (ii) a contact initiated by a third party or (iii) any transaction permitted by the terms of Paragraph 6.03(b). (b) To pay all fees and other expenses required to consummate the Financing Transactions. 6.02. Closing. On the Closing Date, in addition to the delivery of the consideration for the New Preferred Stock and the Common Stock due under Paragraph 1.04, Purchaser will deliver, or cause to be delivered (on behalf of the Company, in the case of clauses (d), (e) and (f)) to the Company the following documents: 38 39 (a) A Certificate of Purchaser dated as of the Closing Date, certifying on behalf of Purchaser in such detail as the Company may reasonably specify the fulfillment of the conditions set forth in Paragraphs 8.02 (a) and (b); (b) If applicable, certified resolutions of Purchaser's and/or its designees' General Partner or other governing body authorizing and approving as to Purchaser and/or such designees the Transactions contemplated herein and the execution and delivery by Purchaser and/or its designees, as applicable, of all of the documents contemplated herein to be executed and delivered by it, the purchase by such Purchaser and/or its designees, as applicable, of the New Preferred Stock and the Common Stock to be purchased by it pursuant to Paragraph 1.05 and the payment by Purchaser and/or its designees of the consideration for the New Preferred Stock and the Common Stock due from it under Paragraph 1.05; (c) If applicable, a Certificate of Good Standing with respect to Purchaser and/or its designees issued within the 10 days prior to the Closing Date by the Secretary of State of Delaware and/or the state of incorporation of Purchaser's designees if other than Delaware; (d) The Employment Agreements duly executed by an individual authorized to act on behalf of the Company effective immediately after the Closing; (e) A Lease Agreement in the form attached hereto as Exhibit K duly executed by an individual authorized to act on behalf of the Company effective immediately after the Closing (the "BSL Lease"); (f) A Shared Services Agreement in the form attached hereto as Exhibit L duly executed by an individual authorized to act on behalf of the Company effective immediately after the Closing (the "Shared Services Agreement"); and (g) An opinion or opinions of counsel to Purchaser dated as of the Closing Date in form and substance reasonably acceptable to the Company. 6.03. Other Covenants. (a) Purchaser shall not solicit any of the officers, employees or consultants of the Company or any of the Subsidiaries or interfere with the consummation of, or pursue in its own name or on its own behalf, any acquisition, management or lease opportunities which are under consideration or negotiation by the Company as of the date hereof or as of the Closing Date and with respect to which Purchaser has obtained knowledge during the course of its negotiations with or due diligence investigation of the Company. Purchaser shall not be deemed to be in breach of this Paragraph 6.03(a) and/or its obligations under the Confidentiality Agreement (as defined below) in connection with any acquisition, management or lease opportunities pursued by it in response to (i) an "auction" type bid process or (ii) a contact initiated by a third party. The obligations of the 39 40 Purchaser under this Paragraph 6.03(a) shall survive the termination of this Agreement pursuant to Article IX hereof for the period specified in Article X hereof. (b) Principal shall not solicit any of the officers, employees or consultants of the Company or any of the Subsidiaries or interfere with the consummation of, or pursue in its own name or on its own behalf, any acquisition, management or lease opportunities which are under consideration or negotiation by the Company as of the date hereof or as of the Closing Date and with respect to which Principal has obtained knowledge during the course of its negotiations with or due diligence investigation of the Company. Principal shall not be deemed to be in breach of this Paragraph 6.03(b) and/or its obligations under the Confidentiality Agreement in connection with any acquisition, management or lease opportunities pursued by it in response to (i) an "auction" type bid process or (ii) a contact initiated by a third party. The obligations of Principal under this Paragraph 6.03(b) shall survive the termination of this Agreement pursuant to Article IX hereof for the period specified in Article X hereof. ARTICLE VII MUTUAL COVENANTS 7.01. General Covenants. Following the execution of this Agreement and until the Closing Date, the Company and Purchaser agree: (a) If any event should occur, either within or without the control of any party, which would prevent fulfillment of the conditions to the obligations of any party hereto to consummate the transactions contemplated by this Agreement, to use its or their reasonable efforts to cure the same as expeditiously as possible; (b) To cooperate fully with each other in preparing, filing, prosecuting, and taking any other actions which are or may be reasonable and necessary to obtain the consent of any governmental instrumentality or any third party, to accomplish the transactions contemplated by this Agreement; (c) To deliver such other instruments of title, certificates, consents, endorsements, assignments, assumptions and other documents or instruments, in form reasonably acceptable to the party requesting the same and its counsel, as may be reasonably necessary to carry out and/or to comply with the terms of this Agreement and the transactions contemplated herein; (d) To confer on a regular basis with the other, report on material operational matters and promptly advise the other orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen could have, a material adverse effect on such party or which would cause or constitute a material breach of any of the representations, warranties or covenants of such party contained herein; 40 41 (e) To promptly provide the other (or its counsel) with copies of all other filings made by such party with any state or federal governmental entity in connection with this Agreement or the transactions contemplated hereby. 7.02. Hart-Scott-Rodino Filing. (a) The Company and Purchaser agree to file with the Antitrust Division of the United States Department of Justice and the Federal Trade Commission a Notification and Report Form in accordance with the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") and to use its and their reasonable efforts to achieve the prompt termination or expiration of the waiting period or any extension thereof provided for under the HSR Act as a prerequisite to the consummation of the transactions provided for herein (the "HSR Approval"); provided, however, that the Principal shall be responsible for any filing fees due under the HSR Act. (b) Nothing in this Paragraph 7.02 shall be construed as requiring the Company to (i) sell or otherwise dispose of any of its assets which either alone or in the aggregate, with all such other sales or dispositions, would constitute the sale or disposition of a "significant subsidiary" (as defined in Rule 1-02 of Regulation S-X of the rules and regulations of the Securities and Exchange Commission), (ii) take any action, the consummation of which cannot be conditioned on the consummation of the transactions contemplated by this Agreement, where such action would have a Company Material Adverse Effect (as defined in Paragraph 8.01) or (iii) take any action which either would have a Company Material Adverse Effect or would materially impair the value of the transaction contemplated by this Agreement to the Company or Purchaser. (c) Nothing in this Paragraph 7.02 shall be construed as requiring Purchaser to (i) sell or otherwise dispose of any of its assets which either alone or in the aggregate, with all such other sales or dispositions, would constitute the sale or disposition of a "significant subsidiary," (ii) take any action, the consummation of which cannot be conditioned on the consummation of the transactions contemplated by this Agreement or (iii) take any action which either would materially impair the value of the transaction contemplated by this Agreement to the Company or Purchaser. 7.03. Third Party Consents/Regulatory Approval. The Company and the Purchaser will use its and their reasonable efforts to obtain prior to the Closing Date all consents, approvals and licenses necessary to permit the consummation of the transactions contemplated by this Agreement, including, but not limited to, such licensure and certification approval in each of the states in which the Company Facilities are located as may be necessary to enable Purchaser to consummate the Transactions (the "Regulatory Approvals"), and the consent of its or their lenders, lessors and other third parties to the extent required under any loan documents, lease agreements, management agreements or other instruments to which it or its subsidiaries are a party (the "Third Party Consents"). 41 42 7.04. Shareholder Approval. The Company shall promptly submit this Agreement and the transactions contemplated herein and in the Senior Living Transaction and the Excluded Assets Transaction for the approval of its shareholders at a meeting of shareholders. Subject to the fiduciarv duties of the Board of Directors of the Company under applicable law, the Board of Directors of the Company has agreed to recommend to its shareholders approval of the Transactions. Subject to the fiduciary duties of the Board of Directors of the Company under applicable law, the Company shall use its reasonable efforts to obtain shareholder approval and adoption of this Agreement and the Transactions contemplated hereby. Subject to the notice requirements of the Oregon Business Corporation Act, such meeting shall be held as soon as practicable following the execution of this Agreement. 7.05. Public Announcements. The parties shall consult with each other prior to the issuance by either party of any press release or any written statement with respect to this Agreement or the transaction contemplated hereby. 7.06. Subsequent Transaction. On the next business day after the Closing Date or as soon thereafter as may be agreed upon by the Company and Purchaser, pursuant to the terms of a Plan and Agreement of Merger between the Company and Principal to be executed substantially in the form attached hereto as Exhibit M, Principal shall merge with Principal Merger Company, with Principal to be the surviving entity and a wholly-owned subsidiary of the Company. ARTICLE VIII CONDITIONS 8.01. Purchaser's Conditions. All obligations of the Purchaser under this Agreement are subject to the fulfillment, prior to or as of the Closing Date, of each of the following conditions any one or more of which may be waived by written instrument signed by Purchaser or by written instrument signed by Purchaser: (a) Except as would not have a "Company Material Adverse Effect", as defined below, the representations and warranties of the Company contained in this Agreement or in any certificate or document prepared by the Company and delivered in connection with this Agreement or the transaction contemplated herein shall be true at and as of the Closing Date as though such representations and warranties were then again made, other than any representations or warranties which specifically relate to an earlier period, which shall have been true as of the date thereof; provided, however, that in the event this condition is not satisfied as of the Closing Date and the representation or warranty which is untrue is capable of being cured, the Closing Date shall be extended in order to allow the Company to satisfy this condition; provided, however, in no event shall the Closing Date be extended beyond the Outside Closing Date. A "Company Material Adverse Effect" shall be any statement, condition or event that would (A) materially adversely affect the ability of the Company to consummate the Transactions, (B) 42 43 adversely affect the licensure at Closing of any of the Leased Company Facilities as acute care facilities under applicable state law or the certification at Closing of any of the Leased Company Facilities which as the Closing Date are certified under the Medicare and/or Medicaid Programs or result in the termination of any of the Company Management Contracts, where, in each case, such loss of licensure, certification or of the termination of any Company Management Contracts at Closing would result in a Material Adverse Change, as defined below, or (C) result in a "Material Adverse Change." For purposes of this Paragraph 8.01, the term "Material Adverse Change" shall be defined as an event or series of events affecting the Company (but specifically excluding events which are disclosed pursuant to the terms hereof in the Company's Disclosure Letter or in the exhibits hereto as of the date of execution of this Agreement, or that are hereafter disclosed to Purchaser in updates to the Company Disclosure Letter, without Purchaser's objecting thereto pursuant to Paragraph 10.08), that (after taking into account any event or series of events which will have a positive effect on the Company) will have an adverse effect on the Company's earnings before interest, taxes, depreciation and amortization on an annualized basis, calculated as of the Closing Date, in excess of $800,000. (b) Except to the extent failure to do so would not have a Company Material Adverse Effect, the Company shall have performed all of its material obligations under this Agreement that are to be performed by it prior to or as of the Closing Date, including but not limited to the delivery of the documents provided for in Paragraph 5.02, including, but not limited to the Employment Agreements, and the redemption of all of the Redeemed Preferred Stock and of the GECC Preferred Stock, the issuance of the Common Stock and New Preferred Stock to Purchaser and/or its designee; provided, however, that in the event this condition is not satisfied as of the Closing Date and the obligation which the Company has not performed is capable of being cured, the Closing Date shall be extended in order to allow the Company to satisfy this condition; provided, however, in no event shall the Closing Date be extended beyond the Outside Closing Date. The Company shall be deemed to have performed its obligations under this condition in the event all of the documents necessary for said performance have, as of the Closing Date, been delivered to such agent as may be agreed upon by the Company and Purchaser. (c) Except to the extent failure to do so would not have a Company Material Adverse Effect, the Company and Purchaser shall have received the Third Party Consents designated in Section 3.04 of the Company Disclosure Letter and in Section 4.03 of the Purchaser Disclosure Letter and shall have received the Regulatory Approvals and shall have satisfied any and all conditions to the effectiveness thereof. (d) The filing and waiting period requirements under the HSR Act shall have been complied with and shall have expired or terminated. 43 44 (e) The Preferred Stock Repurchase Agreement shall be in full force and effect, neither party thereto shall have breached any of its obligations thereunder and all conditions necessary to the consummation of the transaction contemplated thereby (other than the consummation of the transaction contemplated hereby) shall have been satisfied. (f) The Excluded Assets Transaction shall have been consummated. (g) The Senior Living Transaction shall have been consummated, including the payment of all intercompany loans owing to or from BSL to the Company. (h) Since June 30, 1996, no Company Material Adverse Effect shall have occurred. (i) No order shall be in effect restraining, enjoining or otherwise preventing the Closing. (j) Except to the extent approved by Purchaser pursuant to Paragraph 10.O8, there shall be no changes in the Company's Disclosure Letter between the date hereof and the Closing Date reflecting a Company Material Adverse Effect, which Disclosure Letter may be updated from time to time by the Company in accordance with Paragraph 10.08. (k) The Amended and Restated Brim, Inc. Shareholders Agreement and the Shareholders Agreement between the Company and the holder of the GECC Preferred Stock shall have been terminated. (1) The Company and First Union shall have entered into the Credit Facility providing for loans to the Company of up to $54 million, which loans are described more fully in the First Union Commitment Letter and which Credit Facility shall be in form and substance reasonably satisfactory to the Purchaser, the Bank Agreement shall be in full force and effect as of the Closing and the Bank shall have advanced or be prepared to advance not less than $54 million to the Company under the Bank Agreement upon confirmation that the other parties to the Transactions provided for herein are prepared to consummate the same. (m) The Company and Purchaser's designee shall have entered into a stock purchase agreement and related documents (collectively, as such agreement and documents are amended, modified or waived from time to time in accordance with this Agreement, the "Senior Preferred Purchase Agreement") providing for the purchase by Purchaser's designee of not less than $20 million of the Senior Preferred Stock, which purchase shall be as described more fully in the Investment Commitment Letter and which Senior Preferred Purchase Agreement shall be in form and substance reasonably satisfactory to the Purchaser, the Senior Preferred Purchase Agreement shall be in full force and effect as of the Closing and Purchaser's designee shall have consummated the transaction pursuant to the terms of the Senior Preferred Purchase Agreement or shall be prepared to consummate the same upon confirmation that the other parties to the Transactions provided for herein are prepared to consummate the same. 44 45 (n) The holders of no more than 5% of the Redeemed Preferred Stock shall have exercised their dissenter's rights under ORS ss.60.551, et seq. or under such resolutions of the Board of Directors of the Company as may be adopted at the time of the approval of the Transactions granting such dissenters rights to the extent the provisions of ORS ss.60.551, et seq. do not provide for such rights and the Board of Directors of the Company in the exercise of its fiduciary duties determines that it would be in the best interest of the Company to grant such rights. (o) The Carryco Merger shall have been consummated. (p) Purchaser shall have completed and shall be satisfied with the results of its due diligence review of the Excluded Assets Transaction and the Senior Living Transaction, regarding the assignment, assumption of satisfaction of the liabilities of the Company and its affiliates related to or arising in connection with the entities, assets or operations being sold or transferred thereby, and the existence, nature and scope of any continuing liability of the Company or its affiliates with respect to such entities, assets or operations following the closing of such transactions; provided, however, this condition shall be deemed satisfied unless by the close of third business day following Purchaser's receipt from the Company of the BSL Merger Agreement, Excluded Assets Purchase Agreement, the MSL Purchase Agreement LP Purchase Agreement and all exhibits and schedules thereto requested by Purchaser, in the form in which the Company and the purchasers identified therein are prepared to execute, Purchaser has specified in writing its objections thereto, which objections shall state with specificity the sections to which Purchaser objects and the reasons for its objection. 8.02. Company Conditions. All obligations of the Company under this Agreement are subject to the fulfillment, prior to or as of the Closing Date, of each of the following conditions any one or more of which may be waived by the Company in writing: (a) The representations and warranties of Purchaser contained in this Agreement or in any certificate or document prepared by Purchaser and delivered in connection with this Agreement or the Transactions contemplated herein shall be true in all material respects at and as of the Closing Date as though such representations and warranties were then again made, other than any representations or warranties which specifically relate to an earlier period, which shall have been true as of the date thereof; provided, however, that in the event this condition is not satisfied as of the Closing Date and the representation or warranty which is untrue is capable of being cured, the Closing Date shall be extended in order to allow Purchaser to satisfy this condition; provided, however, in no event shall the Closing Date be extended beyond the Outside Closing Date. (b) Purchaser and/or its designees shall have performed all of its or their material obligations under this Agreement that are to be performed by it or them prior to or as of the Closing Date, including, but not limited to the delivery of the documents provided for in Paragraph 6.02 and the delivery of the cash consideration due from it or them under Article I with respect to the Common Stock and New Preferred Stock issued to Purchaser and/or its designees; provided, 45 46 however, that in the event this condition is not satisfied as of the Closing Date and the obligation which Purchaser and/or its designees has not performed is capable of being cured, the Closing Date shall be extended in order to allow Purchaser and/or its designee to satisfy this condition; provided, however, in no event shall the Closing Date be extended beyond the Outside Closing Date. Purchaser and/or its designees shall be deemed to have performed its or their obligations under this condition in the event all of the documents necessary for said performance have, as of the Closing Date, been delivered to such agent as may be agreed upon by the Company and Purchaser. (c) Except to the extent the failure to do so would not have a Company Material Adverse Effect, the Company and Purchaser shall have received the Third Party Consents designated in Section 3.04 of the Company Disclosure Letter and shall have received the Regulatory Approvals and shall have satisfied any and all conditions to the effectiveness thereof. (d) The filing and waiting period requirements under the HSR Act shall have been complied with and shall have expired or terminated. (e) The Preferred Stock Repurchase Agreement shall be in full force and effect, neither party thereto shall have breached any of its obligations thereunder and all conditions necessary to the consummation of the transaction contemplated thereby (other than the consummation of the transaction contemplated hereby) shall have been satisfied. (f) The Excluded Assets Transaction shall have been consummated. (g) The Senior Living Transaction shall have been consummated, including the payment of all intercompany loans owing to or from BSL to the Company. (h) The Carryover Merger shall have been consummated. (i) The Carryover Shareholders and the Purchaser shall have entered into a shareholder agreement on terms and conditions acceptable to each party thereto addressing the rights and obligations of the parties after the Closing Date as shareholders of the Company, including, but not limited to, their right to acquire additional shares of the Company's common or preferred stock and the affect of the issuance of additional shares of the Company's common or preferred stock on their percentage ownership interest in the Company, all as described more fully in the Term Sheet attached hereto as Exhibit N (the "Shareholders Agreement"). ARTICLE IX TERMINATION/INDEMNIFICATION 9.01. Termination. This Agreement may be terminated by the parties hereto upon the following conditions: 46 47 (a) By mutual consent of the parties; (b) By Purchaser, if the conditions to Closing set forth in Paragraph 8.01 have not been satisfied or waived by the Outside Closing Date or any extension thereof provided for in Paragraph 8.01; provided, however, the Purchaser shall have no right to terminate the Agreement under this Paragraph 9.01(b) if the condition has not been satisfied or waived as a result of the breach by the Purchaser of its obligations hereunder; (c) By the Company if the conditions to Closing set forth in Paragraph 8.02 have not been satisfied or waived by the Outside Closing Date or any extension thereof provided for in Paragraph 8.02; provided, however, the Company shall have no right to terminate the Agreement under this Paragraph 9.01 (c) if the condition has not been satisfied or waived as a result of the breach by the Company of its obligations hereunder; (d) By either party if the United States Department of Justice or the Federal Trade Commission requires any of the actions described in Paragraph 7.02. 9.02. Effect of Termination. In the event of the termination of this Agreement by either party in accordance with Paragraph 9.01, this Agreement shall be null and void and of no further force and effect and no party shall have any further rights or obligations hereunder, other than the following: (a) The obligations of the Company, the Purchaser and Principal to return any documents as set forth in the Confidentiality Agreement dated June 25, 1996 executed by the Company and Principal (the "Confidentiality Agreement") and to which the Purchaser agreed to be bound by that Letter of Intent dated September 25, 1996 (as the same may be amended from time to time, the "Letter of Intent"), and to keep confidential any Confidential Information (as defined therein) obtained in furtherance thereof; (b) The right of either party to seek specific performance or damages or to pursue any other remedy which may be available to it at law or in equity for the breach of any covenant or agreement of any other party hereto, in the event of a termination pursuant to Paragraphs 9.01(b) or 9.01(c) resulting from a failure of the conditions set forth in Paragraphs 8.01(b) or 8.02 (b), respectively. 9.03. Indemnification. Provided that this Agreement has not been terminated pursuant to Paragraph 9.01, from and after the Closing Date, the Company shall indemnify the Purchaser, its partners and affiliates, Purchaser's designees and their respective partners, officers, directors, employees and affiliates from and against any and all claims, damages, losses, expenses, costs (including reasonable attorneys fees), deficiencies, penalties, interest, fines, obligations or liabilities of any kind and claims brought by third parties (collectively "Losses") suffered or incurred by the Purchaser its partners and affiliates, Purchaser's designees and their respective partners, officers, 47 48 directors, employees and affiliates or by the Company or its officers, directors, employees or affiliates in the event of a breach by the Company of its representations, warranties or covenants set forth in this Agreement; provided, however, that the Purchaser's recourse for any and all such Losses shall be limited to the funds on deposit in the Escrow Account (excluding the funds in the Agent/Legal Fees Expense Account) described in Paragraph 1.04 hereof and shall be further limited by the provisions of Paragraph 9.06 below. 9.04. Indemnification Procedures. (a) In the event that any circumstances exist or any claim is made against Purchaser, its partners or affiliates, Purchaser's designees and their respective partners, officers, directors, employees and affiliates or against the Company, its directors, officers, employees or affiliates, after the Closing Date (hereinafter the "Indemnified Party") which the Indemnified Party believes will result in the Indemnified Party incurring a Loss, or in the event the Indemnified Party believes it has incurred a Loss, it will promptly deliver to the Escrow Agent and to the Agent written notice (the "Loss Notice") setting forth a reasonable summary of the nature of the Loss and the facts giving rise thereto and specifying the section of this Agreement to which such Loss relates and the amount thereof. (b) in the event the Loss Notice involves a claim made by a third party, in the form of a demand letter or lawsuit, against the Indemnified Party which the Purchaser believes represents a breach of representation, warranty or covenant by the Company, it shall include a copy of such claim in the Loss Notice and the Indemnified Party's reasonable estimate of the amount sought under the terms thereof (the "Third Party Claim"). (c) The Agent shall have the right to dispute the Loss on behalf of the former holders of the Redeemed Preferred Stock and the former holder of the GECC Preferred Stock by the delivery of written notice (the "Dispute Notice") to the Escrow Agent and to the Indemnified Party and the Company within twenty (20) business days of the delivery to Escrow Agent and the Agent of the Loss Notice. In the event of a Loss which relates to a Third Party Claim, the Agent shall have the following options: (i) The Agent may submit a Dispute Notice with respect to such Third Party Claim, in which case the Agent shall be deemed to have waived its right, on behalf of the former holders of the Redeemed Preferred Stock and the former holder of the GECC Preferred Stock, to defend such Third Party Claim on behalf of the Indemnified Party; or (ii) The Agent may submit notice to the Purchaser, the Company and the Escrow Agent within the twenty (20) day period in which a Dispute Notice would otherwise be due that it has elected to retain counsel to defend the Third Party Claim on behalf of the Indemnified Party (the "Defense Notice"), in which case such election shall be deemed to be a waiver of any and all rights which the Agent may have on behalf of the former holders of the Redeemed Preferred Stock and the 48 49 former holder of the GECC Preferred Stock to contest the Purchaser's right to seek indemnity from the Escrow Account should the Company's liability be established with respect to said Third Party Claim. (iii) In the event a Dispute Notice is submitted with respect to any such Third Party Claim, the matter submitted to arbitration shall be limited to whether the Third Party Claim represents the breach of a representation, warranty or covenant hereunder. (iv) In no event shall the Agent have the right to defend any such Third Party Claim in the event the Purchaser reasonably determines that the amount which is the subject of said Third Party Claim, when taken together with any other matters which are then the subject of pending Loss Notices, will exceed the then available proceeds in the Escrow Account, it being understood and agreed that the Indemnified Party shall retain the sole right to defend such Third Party Claim; provided, however, that in event the Indemnified Party settle any such Third Party Claim without the prior consent of the Agent, which consent shall not be unreasonably withheld, the reasonableness of the amount of such settlement and/or the portion thereof which should be paid from the Escrow Account may be submitted by the Agent to arbitration in accordance with the provisions hereof. (d) In the event the Agent submits a Dispute Notice within the twenty (20) business day period provided for herein, the Agent and the Purchaser shall submit the matters which are the subject of the Loss Notice to arbitration in accordance with the provisions of Paragraph 9.05 hereof and the Escrow Agent, the Agent, the Company and the Purchaser shall be bound by and shall act in accordance with the determination of the arbitrator. (e) In the event the Agent fails to deliver a Dispute Notice or a Defense Notice within such twenty (20) business day period, the Escrow Agent shall be authorized without further action by or approval of any party hereto to disburse from the Escrow Account the amount which is the subject of the Loss Notice to, or as directed by, the Indemnified Party which submitted the same and, in the case of a Loss Notice which relates to a Third Party Claim, the Indemnified Party shall be required to remit the same to the person or entity which brought the Third Party Claim and to provide the Agent with evidence thereof; provided, however, that the Indemnified Party shall have the right to elect, in lieu of immediately remitting said funds to the party which brought the Third Party Claim, to defend such Third Party Claim and to use the funds in the Escrow Account to cover the cost of such defense and of any liability which the Company is determined to have with respect thereto by a court of competent jurisdiction or any settlement amount agreed upon by the parties provided that in the event the amount so expended for legal fees and liability or settlement payments shall exceed the amount originally sought in the Third Party Claim, the Indemnified Party shall be solely responsible therefor and shall have no right to seek additional indemnity from the Escrow Account with respect to such excess amounts; and provided, further, that in the event the amount so expended for legal fees and liability or settlement payments is less than the amount originally sought in the Third Party Claim and released from the Escrow Account, the Indemnified Party shall be required to return the excess to the Escrow Agent for deposit in the Escrow Account. 49 50 (f) The Agent shall have the right from time to time to draw on the Agent/Legal Fees Expense Account to pay any costs incurred by him in arbitrating a claim which is the subject of a Dispute Notice or defending a Third Party Claim or any fees due to him under the terms of any agreements between the Agent and the former holder of the GECC Preferred Stock and the former holders of the Redeemed Preferred Stock and the Indemnified Party shall have no right to control or otherwise object to the disbursement of the funds from the Agent/Legal Fees Expense Account. 9.05. Arbitration. (a) Any matters which are the subject of a Loss Notice and a Dispute Notice shall be submitted for resolution to arbitration in such location as may be agreed upon by the Purchaser and the Agent or, in the event the Purchaser and the Agent are unable to agree upon a location within ten (10) days after the date of a Dispute Notice, in Denver, Colorado, under the Commercial Arbitration Rules of the American Arbitration Association before a single arbitrator selected by mutual agreement of the Purchaser and the Agent to which shall be added the provisions of the Federal Rules of Civil Procedure relating to the production of evidence and the parties agree that the arbitrator may impose sanctions in his/her discretion to enforce compliance with discovery and other obligations. (b) If the Purchaser, on the one hand, and the Agent, on the other hand, do not agree on the arbitrator within twenty (20) business days after the delivery by Agent of a Dispute Notice, the arbitrator shall be selected by them from a list of five potential arbitrators provided by the American Arbitration Association. Such list shall be provided within ten (10) davs of the expiration of said twenty (20) business day period. The Purchaser shall first delete one name from the list and then the Agent shall delete one name from the list. This process shall continue in the same order until the last remaining person on the list shall be the arbitrator. This selection process shall take place within two business days following both parties' receipt of the list of five potential arbitrators. (c) Hearings in such arbitration shall commence within twenty (20) business days of the selection of the arbitrator or as soon thereafter as the arbitrator is available. The arbitrator shall deliver his/her opinion within twenty (20) business days after completion of the arbitration hearing. The arbitrator's decision shall be final and binding upon the parties and may be entered and enforced in any court of competent jurisdiction by either of the parties. (d) Unless otherwise ordered by the arbitrator, the non-prevailing party shall be responsible for the arbitrator's expenses. (e) In the event the arbitrator determines that a Loss Notice which relates to a Third Party Claim is the subject of an indemnifiable loss under the terms of this Paragraph 9, the Indemnified Party shall have the right to make a demand on the Escrow Account in an amount equal to any and all costs and expenses incurred to the date of said determination and/or thereafter incurred in defending such Third Party Claim but shall not have the right to make a demand for any other 50 51 portion of any Losses related thereto unless and until the liability of the Company is determined on a final non-appealable basis in the action which is the subject of such Third Party Claim or is otherwise determined by a settlement agreement to which the Company is a party. In the event the arbitrator determines that a Loss Notice which relates to a Third Party Claim is not the subject of an indemnifiable loss, the Indemnified Party shall have no access to the Escrow Account with respect to any Losses incurred in connection therewith and shall be required to reimburse the Agent for any and all costs and expenses incurred by him in successfully defending against such Loss Notice. 9.06. Limitation on Claims. (a) Purchaser shall have no right to recover with respect to any Losses until the amount of all such Losses is equal to or greater than Five Hundred Thousand and no/100 Dollars ($500,000) individually or in the aggregate (the "Loss Threshold") and thereafter Purchaser shall only be entitled to recover Losses suffered or incurred by it or the Company in excess of the Loss Threshold. In addition and subject to the further limitation set forth in Paragraph 9.06(c), any and ail claims for the recovery of Losses must be brought by Purchaser within eighteen (18) months after the Closing Date (the "Limitation Period"). (b) Any and all funds remaining in the Escrow Account at the end of the Limitation Period (the "Remaining Escrowed Funds"), along with the accrued interest thereon, shall be released by the Escrow Agent to the former holders of the Redeemed Preferred Stock, the former holders of the Accelerated Options and/or the Purchased Options, the former holder of the GECC Preferred Stock and to the Carryover Shareholders as follows: (i) 64.15% of the Remaining Escrowed Funds, along with 64.15% of the accrued interest thereon, shall be disbursed to the former holders of the Redeemed Preferred Stock, the former holders of the Accelerated Options and/or Purchased Options and the Carryover Shareholders based on the percentage of the Company's fully diluted common stock owned by each such stockholder or option holder on November 6, 1996, as set forth in Exhibit O hereto and (ii) 35.85% of the Remaining Escrowed Funds, along with 35.85% of the accrued interest thereon, shall be disbursed to the former holder of the GECC Preferred Stock; provided, however, that as to any Loss Notices submitted prior to the expiration of the Limitation Period in excess of the Loss Threshold which do not involve a Third Party Claim and which remain unresolved at the end of the Limitation Period, sufficient funds to cover the Losses which are the subject thereof shall be retained by Escrow Agent in the Escrow Account until the final resolution thereof between the Agent, on the one hand, and the Company or the Purchaser, as applicable, on the other hand, in accordance with the arbitration procedures set forth in Paragraph 9.05 or, in the event of a Loss Notice which relates to a Third Party Claim which is admitted by the Agent to be, or is determined by the arbitrator to, represent a breach of a representation, warranty or covenant of the Company hereunder, until the final resolution of such Third Party Claim however effected including by the decision of a court of competentjurisdiction, by decision made upon administrative or other non-judicial proceeding or by agreement of the parties thereto, at which time the funds which are the subject of any such Loss Notice(s) shall be disbursed in accordance with the order of the arbitrator, such court of competent jurisdiction or such settlement agreement, as applicable, and, 51 52 in the event any portion thereof is to be disbursed to the former shareholders of the Company, such sum shall be disbursed in accordance with the percentages reflected in this Paragraph 9.06(b). (c) Notwithstanding anything to the contrary contained herein, Purchaser acknowledges and agrees that the indemnity and escrow provisions provided for herein are personal to Purchaser and accordingly that in the event of a transaction involving the Company, other than one or more public offerings of the stock of the Company, which results in a change in the controlling shareholders thereof such that the shareholders immediately after the Closing Date provided for herein own less than 50% of the stock of the Company (the "Early Release Date"), any amounts then held in the Escrow Account which are not the subject of a pending Loss Notice shall immediately upon the consummation of such transaction be released to the former holders of the Redeemed Preferred Stock and the former holder of the GECC Preferred Stock in the manner and according to the percentages set forth in Paragraph 9.06(b) whether or not the Limitation Period has expired as of such date. Any amounts remaining in the Escrow Account after such Early Release Date shall be retained by Escrow Agent in the Escrow Account until the final resolution thereof in accordance with the procedures set forth in Paragraphs 9.04 and 9.05, at which time the funds which are the subject of any such Loss Notice(s) shall be disbursed in accordance with the provisions of Paragraph 9.06(b). 9.07. Escrow Agents' Fees. Any fees or expenses charged by the Escrow Agent shall be shared by the Purchaser, on the one hand, and the Agent on behalf of the former holders of the Redeemed Preferred Stock and the former holder of the GECC Preferred Stock, on the other hand, on a 50-50 basis, and shall be paid from any disbursements which the parties are entitled to receive from the Escrow Account or from any interest earnings thereon. 9.08. Resignation or Removal of Escrow Agent. The parties acknowledge and agree that the Escrow Agent shall have the right to resign or to be removed by mutual agreement of the parties and the parties agree to negotiate in good faith with respect to the designation of a replacement Escrow Agent in the event of such resignation or replacement; provided, however, that in the event the parties are unable to so agree prior to the effective date of said resignation or removal, the Escrow Agent shall deposit any amounts then held by it in the Escrow Account with a court of competent jurisdiction which shall hold the same until the parties are able to agree upon a replacement Escrow Agent or one is otherwise appointed by said court. 9.09. Indemnity of Escrow Agent. The parties acknowledge and agree that the Escrow Agent shall not have any liability hereunder with respect to the protection or disbursement of the funds in the Escrow Account absent gross negligence or wilful misconduct by the Escrow Agent in performing its duties hereunder and accordingly the parties do hereby agree to indemnify, defend and hold harmless the Escrow Agent from and against any and all Losses which it may incur as a result of the performance of its duties hereunder absent gross negligence or wilful misconduct of the Escrow Agent. 52 53 9.10. Further Assurances. The parties agree to execute and to deliver any and all documents as may be reasonably requested by the Escrow Agent to evidence its assumption of the duties and obligations provided for herein, the limitation on its liability as provided for herein, and its right to indemnity and to reimbursement by the parties in accordance with the terms hereof. 9.11. Adjustment of Investment Proceeds. Amounts paid for indemnification under Article IX shall be deemed to be an adjustment to the amount of the Investment Proceeds paid under Paragraph 1.04(b). 9.12. Access to Books and Records. From the Closing Date until the final determination of any matters which are the subject of a Loss Notice and a Dispute Notice, the Agent and his representatives will have access to the books, records and accounts of the Purchaser and the Company and its and their employees. ARTICLE X MISCELLANEOUS 10.01. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be sent by registered or certified mail, postage prepaid, by overnight delivery, hand delivery or facsimile transmission to the following address: To the Company Brim, Inc. Prior to Closing: 305 NE 102nd Avenue Portland, Oregon 97020 Attn: A. E. Brim, President Phone: 503-256-2070 Fax: 503-254-7619 With copy to: The Nathanson Group 1411 Fourth Avenue, Suite 905 Seattle, WA 98101 Attn: Randi S. Nathanson Phone: 206-623-6239 Fax: 206-623-1738 53 54 To Purchaser: Golder, Thoma, Cressey, Rauner Fund IV. L.P. 6100 Sears Tower Chicago, IL 60606-6402 Attn: Joe Nolan Phone: 312-382-2227 Fax: 312-382-2201 With copies to: Waller Lansden Dortch & Davis 511 Union Street, Suite 2100 Nashville, TN 37219 Attn: Kevin D. Norwood Phone: 615-244-6380 Fax: 615-244-6804 And with copies to: Kirkland & Ellis 200 East Randolph Drive Chicago, IL 60601 Attn: Kevin R. Evanich Phone: 312-861-2000 Fax: 312-861-2200 To the Agent: Lee Zinsli 482 SW Riverbend Drive West Linn, OR 97068 Phone: 503-656-2718 Fax: 503-655-8136 To the Company after Closing: c/o Principal Hospital Company 5103 Paddock Village Court Suite A-12 Brentwood, TN 37027 Attn: Martin Rash, President Phone: 615-370-1377 Fax: 615-370-9539 with copies to: Waller Lansden Dortch & Davis 511 Union Street, Suite 2100 Nashville, TN 37219 Attn: Kevin D. Norwood Phone: 615-244-6380 Fax: 615-244-6804 54 55 Notices shall be deemed given three (3) business days after deposit in the mail as provided herein or upon actual receipt if sent by overnight delivery, facsimile transmission or hand delivery. 10.02. Assignment. No party may assign, directly or indirectly, its rights or obligations hereunder without the prior written consent of the other parties; provided, however, that, unless specifically agreed by the parties, no such assignment shall release the assignor of its rights and obligations hereunder. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns, including successors by operation of law pursuant to any merger, consolidation or sale of assets involving either party. Nothing herein shall be construed as prohibiting Purchaser from granting to its designees the right to participate in the Investment in accordance with the provisions of Article I hereof. 10.03. Sole Agreement. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, the Disclosure Letter delivered pursuant hereto, the documents executed and delivered pursuant hereto and the Confidentiality Agreements, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, discussions, writings and agreements between them, including but not limited to the Letter of Intent. 10.04. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 10.05. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon. 10.06. Severability. Should any one or more of the provisions of this Agreement be determined to be invalid, unlawful or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. 10.07. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. 55 56 10.08. Company Disclosure Letter. Anything disclosed in this Agreement or in the Company Disclosure Letter delivered pursuant to this Agreement or in the Company Financial Statements shall be deemed to have been disclosed for any and all purposes to which said information relates; provided, however, that the disclosure in any section of the Company Disclosure Letter shall qualify any other section of this Agreement only to the extent that it is reasonably apparent from a reading of such disclosure that it also qualifies or applies to such other section. Any updates or revisions to the Disclosure Letter delivered by the Company after the date hereof shall for all purposes be deemed to be incorporated into and made a part of the Company Disclosure Letter. The Disclosure Letter may be updated from time to time prior to Closing and will be updated as of, and at the Closing Date, if and to the extent necessary to reflect changes in information disclosed therein, provided, however, that no such additional disclosure shall be deemed to be accepted by Purchaser if such disclosure reflects an event or series of events which would otherwise permit Purchaser to terminate this Agreement for the failure of the conditions to closing set forth in Paragraphs 8.01(a), (b) or (c) unless Purchaser specifically accepts such disclosure in writing. 10.09. Knowledge Defined. To the extent that any of the representations and warranties contained in this Agreement are limited by the phrases "to the knowledge of" or "the Company has no knowledge of" or "Purchaser has no knowledge of" or words or phrases of similar import, the same in the case of the Company and the Subsidiaries, shall mean to the actual knowledge of Messrs. K. David McAllister, A.E. Brim, John R Miller, Steven P. Taylor and James M. Williams, after a diligent review of any documents or other information in their possession or under their control and after making written inquiries of the Chief Executive Officer, Chief Financial Officer and Director of Nursing of each of the Leased Company Facilities, and in the case of Purchaser, shall mean to the actual knowledge of Joseph Nolan after a diligent review of any documents or other information in his possession or under his control and in the case of Principal shall mean to the actual knowledge of Martin Rash and Richard Gore after a diligent review of any documents or other information in their possession or under their control. To the extent that any of the representations and warranties contained in this Agreement refer to verbal notice to a party such notice shall be deemed to have been received if delivered to any officer of such party or to an officer of one of its subsidiaries. 10.10. Third Party Beneficiary. Except as provided in Paragraphs 1.08 and 9.06(b), with respect to the former common and preferred shareholders of the Company, the former holders of the Purchased Options and/or Accelerated Options and the Carryover Shareholders, and in Paragraph 5.03(g), with respect to the employees described therein, and in Paragraphs 5.03(h), (i) and (j), with respect to the persons who were officers or directors of the Company on or prior to the Closing Date, nothing in this Agreement express or implied is intended to and shall not be construed to confer upon or create in any person, other than the parties hereto, which parties shall include Purchaser's designees who execute a counterpart of this Agreement or separate certificate pursuant to Paragraph 4.08(f), any rights or remedies under or by reason of this Agreement, including without limitation, any right to enforce this Agreement. 56 57 10.11. Waiver of Jury Trial. EACH OF THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL ACTION BROUGHT ON OR WITH RESPECT TO THIS AGREEMENT, INCLUDING TO ENFORCE OR DEFEND ANY RIGHTS HEREUNDER AND AGREES THAT ANY SUCH ACTION SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 10.12. Attorneys' Fees. In the event of a dispute between the parties hereto with respect to the interpretation or enforcement of the terms hereof, the prevailing party in any action resulting therefrom shall be entitled to collect from the other its reasonable costs and attorneys' fees, including its costs and fees on appeal. 10.13.Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state or local statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean "including without limitation." In any instance in which the consent of Purchaser is required, it shall be deemed to have been granted if provided by Joe Nolan and in any instance in which the consent of Principal is required, it shall be deemed to have been granted if provided by Richard Gore or Martin Rash. 10.14. Expenses. Except as otherwise provided in Paragraph 9.05, each party shall bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby; provided, however, that Principal shall be solely responsible for any HSR Act filing fee and the Company shall be solely responsible for any fee due to Smith Barney with respect to the Transactions. In addition, the Company shall also bear the first $200,000 of any costs and expenses associated with the Senior Living Transaction or the Excluded Assets Transaction, with any costs related to the Senior Living Transaction and the Excluded Assets Transaction in excess thereof being deducted from the redemption proceeds due to the holders of the Redeemed Preferred Stock and the Redeemed GECC Preferred Stock prior to the distribution thereof to said stockholders. 10.15. Survival. The representations and warranties of the Company shall survive for a period of eighteen (18) months after the Closing and shall be subject to the escrow and indemnity provisions of Article IX hereof. The covenants of Purchaser set forth in Paragraph 6.03(a) and of Principal set forth in Paragraphs 6.01A(a) and 6.03(b) shall survive the termination of this Agreement for a period of three years and, except as modified by the terms of Paragraphs 6.01A(a), 6.03(a) and 6.03(b), the covenants in the Confidentiality Agreement by which the Purchaser and Principal agreed to be bound under the terms of the Letter of Intent shall survive termination for the three year period stated therein. 57 58 IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth therein. BRIM, INC. By: /s/ A. E. Brim ------------------------------------ Its: President GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P. By: /s/ Joseph P. Nolan ------------------------------------ Its: Principal Principal Hospital Company does hereby sign this Agreement for the sole purpose of being bound by Paragraphs 4.01A, 4.02A, 5.01, 6.01A, 6.03(b), 7.02(a), 7.06, 9.02(a), 10.09, 10.13, 10.14 and 10.15 of the Investment Agreement. PRINCIPAL HOSPITAL COMPANY By: /s/ Martin S. Rash ------------------------------------ Its: President 58 59 EXHIBIT INDEX A First Union Commitment Letter and Investment Commitment Letter B Carryover Shareholders: Names and Percentage Ownership in Carryco C Form of Carryco/Brim Merger Agreement D Senior Preferred Rights and Preferences E Junior Preferred Rights and Preferences F GE Stock Purchase Agreement G Senior Living Assets H Employment Agreements I Resigning Officers and Directors J Certain Officers Subject to Post Closing Covenants K Office Lease L Shared Services Agreement M Brim/PHC Merger Agreement N Shareholder Agreement Term Sheet O Pre Closing Shareholders: Names and Percentage Interests 59 60 AGENT'S ACKNOWLEDGMENT The undersigned does hereby execute this Agreement for the sole purpose of acknowledging his agreement on the terms and subject to the conditions set forth in an Agency Agreement to be executed between him and representatives of the former holders of the Redeemed Preferred Stock and the GECC Preferred Stock (the "Agency Agreement") to act as the agent for the former holders of the Redeemed Preferred Stock and the GECC Preferred Stock with respect to any claims for Losses made by the Purchaser under Article IX of this Investment Agreement. The undersigned does not hereby assume any liability for the acts or omissions of any party to this Investment Agreement nor for any errors or omissions in serving as the Agent except as otherwise provided in the Agency Agreement. /s/ Lee Zinsli ----------------------------- Lee Zinsli, Agent 60 EX-10.2 8 FIRST AMENDMENT TO INVESTMENT AGREEMENT 1 Exhibit 10.2 FIRST AMENDMENT TO INVESTMENT AGREEMENT This Amendment is made and entered into as of this 17th day of December, 1996 by and between Brim, Inc. (the "Company") and Golder, Thoma, Cressey, Rauner Fund IV, L.P., a Delaware limited partnership ("Purchaser") and Principal Hospital Company, a Delaware corporation ("Principal"). RECITALS A. The Company, Purchaser and Principal are parties to that Investment Agreement dated November 21, 1996 (the "Investment Agreement"). B. After execution of the Investment Agreement, the Company, Purchaser and Principal agreed to amend the indemnity provisions thereof. C. The Investment Agreement provides that it may be amended by written instrument signed by the Company, Purchaser and Principal. D. The Company, Purchaser and Principal are interested in documenting the terms and conditions on which the indemnity provisions shall be amended. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT 1. Section 1.04(b) is hereby deleted in its entirety and the following inserted instead: (b) On the Closing Date, subject to the terms and conditions set forth herein, the Company shall issue (i) to Purchaser's designees and the Purchaser's designees shall purchase from the Company 20,000 shares of the Senior Preferred Stock, for an aggregate purchase price of $20 million, and (ii) to Purchaser and/or its designees and the Purchaser and/or its designees shall purchase from the Company such number of shares of the Junior Preferred Stock and shares of Common Stock as shall be necessary to ensure that there are sufficient funds available at Closing to consummate the redemption of the Redeemable Junior Preferred and the GECC Preferred in accordance with the terms hereof, which funds are currently anticipated to be approximately $10,000,000. The aggregate purchase price for the New Preferred Stock and the common stock to be purchased by Purchaser and its designees is estimated to be approximately $30,000,000, and is referred to herein as the "Investment Proceeds." On the Closing Date, the Investment Proceeds and the First Union Loan Proceeds shall be payable to the Company as follows: 1 2 (i) Sixty Nine Million Eight Hundred Thousand and no/100 Dollars ($69,800,000) shall be paid in immediately available funds by wire transfer to the Company. (ii) Four Million and no/100 Dollars ($4,000,000) shall be paid in immediately available funds to an interest bearing escrow account established by the Escrow Agent and designated as the "Brim/Principal Escrow Account" to be held by the Escrow Agent. (iii) Fifty Six Thousand Six Hundred Sixty Eight and 81/100 Dollars ($56,668.81) shall be paid in immediately available funds to an account designated by Purchaser for the benefit of the Company in payment of the remaining balance of the intercompany loans described in 5.0l(a)(ii)(E). (iv) One Hundred Forty Three Thousand Three Hundred Thirty One and 19/100 Dollars ($143,331.19) shall be paid in immediately available funds to the Agent/Legal Fees Expense Account to be used by Lee Zinsli, as the agent for the benefit of the former holders of the Redeemed Preferred Stock and of the GECC Preferred Stock (the "Agent") to pay any costs and expenses incurred by the Agent in connection with any claims made under the indemnity provisions hereof and/or under the indemnity provisions of the Senior Living Escrow Agreement. The funds in the Brim/Principal Escrow Account shall be disbursed in accordance with the provisions of Article IX hereof and/or any Escrow Agreement which may be executed pursuant thereto. 2. The table set forth in Section 1.07 and Section 1.08 are hereby amended to reflect that pursuant to the last sentence of Section 1.08 the Company and Purchaser have reviewed the Estimated Senior Living Tax Liability reflected in the Investment Agreement and have agreed that the amount of the Estimated Senior Living Tax Liability shall, for all purposes of the Investment Agreement, be $2,834,464. 3. Section 2.03 is hereby amended to provide that the Outside Closing Date shall be December 18, 1996. The Company and Purchaser acknowledge and agree that certain documents executed in connection with the Transactions will be dated December 17, 1996. Nothing therein shall be construed as inferring in any manner that the Closing occurred, or that Purchaser or its designees were shareholders of the Company, either prior to December 18, 1996 or prior to the consummation of the Divestitures. 4. Section 9.03 is hereby deleted in its entirety and the following inserted instead: 9.03. Indemnification. Provided that this Agreement has not been terminated pursuant to Paragraph 9.01, from and after the Closing Date, the Company shall indemnify the Purchaser, its partners and affiliates, Purchaser's designees and their respective partners, officers, directors, employees and affiliates from and against any and all claims, damages, losses, expenses, costs (including reasonable attorneys fees), deficiencies, penalties, 2 3 interest, fines, obligations or liabilities of any kind and claims brought by third parties (collectively "Losses") suffered or incurred by the Purchaser its partners and affiliates, Purchaser's designees and their respective partners, officers, directors, employees and affiliates or by the Company or its officers, directors, employees or affiliates in the event: (a) Of a breach by the Company of its representations, warranties or covenants set forth in this Agreement; provided, however, that the Purchaser's recourse for any and all such Losses shall be limited to the funds on deposit in the Escrow Account (excluding the funds in the Agent/Legal Fees Expense Account) described in Paragraph 1.04 hereof and shall be further limited by the provisions of Paragraph 9.06 below; provided, further, that the Purchaser's recourse for any and all Losses arising from a breach of the covenants set forth in Paragraphs 5.0l(a)(ii)(C) and (E) shall be subject to the Limitation Period set forth in Paragraph 9.06(a), but shall not be subject to the Loss Threshold set forth in Paragraph 9.06(a). (b) A request for a Supplementary Advance Reimbursement is made by Brim, Inc. after Closing under the terms of the BSL Merger Agreement and either (i) the parties agree, after the audit thereof by Encore pursuant to the rights granted to it under the BSL Merger Agreement, or (ii) a determination is made pursuant to the arbitration provisions set forth in the BSL Merger Agreement, that, in either case, the amount was advanced in respect of the Development Projects (as that term is defined in the BSL Merger Agreement) but was not expended in accordance with the requirements of the BSL Merger Agreement (the "Advance Reimbursement Indemnity"); provided, however, that the Purchaser's recourse for amounts which are the subject of the Advance Reimbursement Indemnity shall be limited to the funds on deposit in the Escrow Account (excluding the funds in the Agent/Legal Fees Expense Account) described in Paragraph 1.04 hereof shall be subject to the Limitation Period set forth in Paragraph 9.06(a) but shall not be subject to the Loss Threshold set forth in Paragraph 9.06(a). (c) Any and all costs and expenses associated with the Senior Living Transaction or the Excluded Assets Transaction in excess of $1,000,000, for which the Redemption Price was to be adjusted pursuant to Section 1.07 but which, as a result of differences between the estimated Purchase Price Adjustments used in calculating the Net Redemption Price and the actual costs to the Company, were not fully accounted for in calculating the Net Redemption Price paid at Closing (the "Transaction Costs Indemnity"); provided, however, that the Purchaser's recourse for amounts which are the subject of the Transaction Costs Indemnity shall be limited to the funds on deposit in the Escrow Account (excluding the funds in the Agent/Legal Fees Expense Account) described in Paragraph 1.04 hereof shall be subject to the Limitation Period set forth in Paragraph 9.06(a) but shall not be subject to the Loss Threshold set forth in Paragraph 9.06(a). 3 4 5. Section 9.06(a) is hereby deleted in its entirety and the following inserted instead: Except as otherwise specifically provided in Paragraph 9.03(a) with respect to a breach of the covenants set forth in Paragraphs 5.0l(a)(ii)(C) and (E) and in Paragraph 9.03(b) with respect to the Advance Reimbursement Indemnity and, Purchaser shall have no right to recover with respect to any Losses until the amount of all such Losses is equal to or greater than Five Hundred Thousand and no/100 Dollars ($500,000) individually or in the aggregate (the "Loss Threshold") and thereafter Purchaser shall only be entitled to recover Losses suffered or incurred by it or the Company in excess of the Loss Threshold. In addition and subject to the further limitation set forth in Paragraph 9.06(c), any and all claims for the recovery of Losses must be brought by Purchaser within eighteen (18) months after the Closing Date (the "Limitation Period") with the exception of claims for the recovery of Losses arising from a breach by the Company of its representation and warranties set forth in Paragraph 3.11 which must be brought within thirty one (31) months after the Closing Date (the "Tax Limitation Period"). 6. Section 9.06(b) is hereby deleted in its entirety and the following inserted instead: (i) Except as otherwise specifically provided in Paragraphs 9.06(b)(ii) and (iii), any and all funds remaining in the Escrow Account at the end of the Limitation Period (the "Remaining Escrowed Funds"), along with the accrued interest thereon, shall be released by the Escrow Agent to the former holders of the Redeemed Preferred Stock, the former holders of the Accelerated Options and/or the Purchased Options, the former holder of the GECC Preferred Stock and to the Carryover Shareholders (collectively, the "Former Holders") as follows: (i) 64.15% of the Remaining Escrowed Funds, along with 64.15% of the accrued interest thereon, shall be disbursed to the Former Holders based on the percentage of the Company's fully diluted common stock owned by each such stockholder or option holder on November 6, 1996, as set forth in Exhibit O hereto and (ii) 35.85% of the Remaining Escrowed Funds, along with 35.85% of the accrued interest thereon, shall be disbursed to the former holder of the GECC Preferred Stock. (ii) Notwithstanding the foregoing, as to any Loss Notices submitted prior to the expiration of the Limitation Period in excess of the Loss Threshold which do not involve a Third Party Claim and which remain unresolved at the end of the Limitation Period, sufficient funds to cover the Losses which are the subject thereof shall be retained by Escrow Agent in the Escrow Account until the final resolution thereof between the Agent, on the one hand, and the Company or the Purchaser, as applicable, on the other hand, in accordance with the arbitration procedures set forth in Paragraph 9.05 or, in the event of a Loss Notice which relates to a Third Party Claim which is admitted by the Agent to be, or is determined by the arbitrator to, represent a breach of a representation, warranty or covenant of the Company hereunder, until the final resolution of such Third Party Claim however effected including by the decision of a court of competent jurisdiction, by 4 5 decision made upon administrative or other non-judicial proceeding or by agreement of the parties thereto, at which time the funds which are the subject of any such Loss Notice(s) shall be disbursed in accordance with the order of the arbitrator, such court of competent jurisdiction or such settlement agreement, as applicable, and, in the event any portion thereof is to be disbursed to the Former Holders, such sum shall be disbursed in accordance with the percentages reflected in Paragraph 9.06(b)(i). (iii) Notwithstanding the foregoing, the sum of Two Hundred Thousand and no/100 Dollars or the Remaining Escrowed Funds, whichever is less (the "Tax Escrow Funds") shall remain in escrow until the end of the later of (A) the Tax Limitation Period or (B) the final resolution of any Losses as to which a Loss Notice is pending at the end of the Tax Limitation Period however such resolution is effected including by the decision of a court of competent jurisdiction, by decision made upon administrative or other nonjudicial proceeding or by agreement of the parties thereto, at which time the Tax Escrow Funds shall be disbursed either (X) to the Former Holders if no such Loss Notices are pending at the end of the Tax Limitation Period or (Y) in accordance with the order of the arbitrator, such court of competent jurisdiction or such settlement agreement, as applicable, if such Loss Notices are pending at the end of the Tax Limitation Period, and in either event any portion of the Tax Escrow Funds which is to be disbursed to the Former Holders shall be disbursed in accordance with the percentages reflected in Paragraph 9.06(b)(i). 7. The following is inserted as Paragraph 9.13: 9. 13. Income Taxes. The Company and the Purchaser acknowledge and agree that the funds in the Escrow Account described in Paragraph 1.04 shall, except as otherwise provided herein, be deemed for purposes of the tax laws to be the property of the Former Holders and accordingly that the Former Holders shall be required to pay income taxes on any interest earned thereon. Notwithstanding the foregoing, if and to the extent, pursuant to Paragraph 9.07, the Purchaser utilizes the interest earned on the funds in the Escrow Account to pay its portion of the fees or expenses charged by the Escrow Agent or receives a disbursement for taxes as set forth below, such interest income shall be deemed for purposes of the tax laws to be the property of the Purchaser and accordingly the Purchaser shall be required to pay income taxes on the amount of interest earnings so utilized by it. The Company and the Purchaser further acknowledge and agree that each of the Former Holders and the Purchaser shall have the right to withdraw from interest earned on the funds in the Escrow Account sufficient funds to paid said income taxes on the foregoing amounts at an assumed tax rate of 45% in the case of the Former Holders and 42% in the case of the Purchaser and that any interest on the Escrow Account available for disbursement pursuant to the terms hereof shall be reduced by such amount. 5 6 8. Except as specifically set forth herein, the Investment Agreement shall remain in full force and effect as originally executed. SIGNATURES ON FOLLOWING PAGE 6 7 IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth therein: BRIM, INC. By: /s/ A. E. Brim ---------------------------------- Its: President --------------------------------- GOLDER, THOMA, CRESSEY, RAUNER FUND IV, L.P. By: /s/ Bruce Rauner ------------------------------------ Its: Principal ---------------------------------- ACKNOWLEDGEMENT OF PRINCIPAL AND AGENT The undersigned, being parties to the Investment Agreement do hereby acknowledge the amendments to the Investment Agreement provided for above and do hereby reaffirm their obligations under the Investment Agreement notwithstanding the amendments provided for above. PRINCIPAL HOSPITAL COMPANY By: /s/ Martin S. Rash ----------------------------------- Its: CEO ---------------------------------- /s/ Lee Zinsli ----------------------------- LEE ZINSLI, AGENT EX-10.4 9 PREFERRED STOCK PURCHASE AGREEMENT 1 Exhibit 10.4 PREFERRED STOCK PURCHASE AGREEMENT PREFERRED STOCK PURCHASE AGREEMENT, dated as of November 25, 1996 (the "Agreement"), between Brim, Inc., an Oregon corporation (the "Purchaser"), and General Electric Capital Corporation, a New York corporation (the "Seller"). BACKGROUND A. The Purchaser has entered into the following series of agreements: (i) That Investment Agreement dated November 21, 1996 (the "Investment Agreement") by and between Purchaser and Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("Golder Thoma") which contemplates, among other things, that Golder Thoma and/or its designee will acquire certain newly issued shares of common and preferred stock of the Purchaser (the "Investment Transaction"). (ii) That Merger Agreement dated November27, 1996 (the "BSL Merger Agreement") by and among the Purchaser, Brim Senior Living, Inc. ("BSL") and Encore Senior Living, LLC ("Encore"), pursuant to which, among other things, BSL will be merged with and into Encore and certain assets of the Purchaser related to the business conducted by BSL will be sold to Encore (the "BSL Merger and Related Transactions"). (iii) That Stock Purchase Agreement dated November 27, 1996 (the "MSL Stock Purchase Agreement") by and between the Purchaser and CC Lantana, Inc. ("CC") pursuant to which, among other things, CC will acquire from Purchaser all of the issued and outstanding stock of its wholly owned subsidiary Meridian Senior Living, Inc. (the "MSL Transaction"). (iv) That Purchase Agreement dated November 25, 1996 (the "Meridian Purchase Agreement") by and among Purchaser and K. David McAllister and James Williams pursuant to which, among other things, Messrs. Williams and McAllister will acquire from Purchaser its limited partnership interest in Meridian Park Village Limited Partnership (the "Meridian Park Transaction"). 1 2 (v) That Purchase Agreement dated November 25, 1996 (the "Plaza Purchase Agreement") by and among Purchaser, certain subsidiaries of Purchaser and Plaza Enterprises, LLC ("Plaza"), pursuant to which, among other things, Plaza will acquire from Purchaser and such subsidiaries certain medical office buildings and a home health business in which Purchaser and said subsidiaries are currently engaged (the "Plaza Transaction"). Hereinafter the Investment Transaction, the BSL Merger and Related Transactions, the MSL Transaction, the Meridian Park Transaction and the Plaza Transaction will be collectively referred to as the "Transactions" and the Investment Agreement, the BSL Merger Agreement, the MSL Stock Purchase Agreement, the Meridian Purchase Agreement and the Plaza Purchase Agreement will be collectively referred to as the "Transaction Documents." B. In connection with its entering into the Transaction Documents, the Purchaser has requested that the Seller enter into this Agreement pursuant to which the Purchaser shall repurchase all 96,000 shares of Series A Cumulative Convertible Preferred Stock of the Purchaser (the "Preferred Stock") owned by Seller (the "Seller's Shares") upon the terms and subject to the conditions hereinafter set forth. TERMS In consideration of the respective representations, warranties, covenants and agreements of the parties set forth in this Agreement, the parties hereto agree as follows: 1. Representations and Warranties of Seller. Seller hereby represents and warrants to Purchaser that: (a) Organization. Seller is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, and has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted. (b) Share Ownership. Seller owns 96,000 shares of Preferred Stock of record or beneficially, as of the date hereof. Seller owns all such shares free and clear of all liens, encumbrances, equities or claims. 2 3 (c) Authority. Seller has all requisite corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Seller, the performance of this Agreement by Seller and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action and no other corporate proceeding on the part of Seller is necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Seller and, assuming the due authorization, execution and delivery hereof by Purchaser, constitutes the valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforceability may be limited by creditors' rights laws or general principles of equity. (d) No Conflict: Required Filings and Consents. (i) The execution and delivery of this Agreement by Seller does not, and the performance of this Agreement by Seller and the consummation of the transactions contemplated hereby will not, conflict with or violate any of the Certificate of Incorporation or Bylaws of Seller, conflict with or violate any laws applicable to Seller or by or to which any of Seller's properties or assets is bound or subject or result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or require payment under, or result in the creation of a lien on any of the properties or assets of Seller, pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Seller is a party or by which Seller or any of Seller's properties or assets is bound or subject, in each case, other than any conflict, violation, breach, default, right, payment or lien which would not, individually or in the aggregate, have a material adverse effect on the Seller or on its ability to sell the Seller's Shares to Purchaser pursuant to this Agreement. (ii) The execution and delivery of this Agreement by Seller does not, and the performance by Seller of this Agreement and the consummation of the 3 4 transactions contemplated hereby will not, require Seller to obtain any consent, approval, authorization or permit of, or to make any filing with or notification to, any governmental entity, in each case, other than any consent, approval, authorization, permit, filing or notification, which, if not made or obtained, would not, individually or in the aggregate, have a material adverse effect on the Seller or on its ability to sell the Seller's Shares to Purchaser pursuant to this Agreement. (e) Absence of Litigation. There is no claim, action, suit, proceeding or investigation of any kind, at law or in equity (including actions or proceedings seeking injunctive relief), by or before any governmental entity pending or, to the knowledge of Seller, threatened against Seller or affecting any of Seller's businesses, assets or rights that would impair Seller's ability to consummate the transactions contemplated hereby and Seller is not a party or subject to or in default under any judgment, order or decree of any governmental entity that could impair its ability to consummate the transactions under this Agreement. (f) Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller. (g) Purchaser's Proxy Statement. Seller has received and reviewed a copy of the Proxy Statement dated November 29, 1996 (the "Proxy Statement) regarding the Transactions (as defined in the Investment Agreement). 2. Representations and Warranties of Purchaser. Purchaser hereby represents and warrants to Seller that: (a) Organization. Purchaser is a corporation duly organized and validly existing under the laws of the State of Oregon and has all requisite corporate power and corporate authority to own, lease and operate its properties and to carry on its business as now being conducted. 4 5 (b) Authority. Purchaser has all requisite corporate power and corporate authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Purchaser, the performance of this Agreement by Purchaser and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action (including, without limitation, approval by the Purchaser's Board of Directors) and no other corporate proceeding on the part of Purchaser is necessary to authorize this Agreement or to consummate the transactions contemplated hereby other than the approval of the consummation of the transactions contemplated hereby by the shareholders of Purchaser. This Agreement has been duly executed and delivered by Purchaser and, assuming the due authorization, execution and delivery hereof by Seller and approval of the Transactions by the shareholders of Purchaser, constitutes the valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as such enforceability may be limited by applicable creditors' rights laws or general principles of equity. (c) No Conflict: Required Filings and Consents. (i) The execution and delivery of this Agreement by Purchaser does not, and the performance of this Agreement by Purchaser and the consummation of the transactions contemplated hereby will not, conflict with or violate the Restated Certificate of Incorporation or By-Laws of Purchaser, conflict with or violate any laws applicable to Purchaser or by or to which any of its properties or assets is bound or subject or result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or require payment under, or result in the creation of a lien on any of the properties or assets of Purchaser, pursuant to any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of its properties or assets is bound or subject, in each case, other than any conflict, violation, breach, default, right, payment or lien which would not, individually or in the aggregate, have a material adverse effect on the 5 6 Purchaser or on its ability to purchase the Seller's Shares from Seller pursuant to this Agreement. (ii) The execution and delivery of this Agreement by Purchaser does not, and the performance by Purchaser of this Agreement and the consummation of the transactions contemplated hereby will not, require Purchaser to obtain any consent, approval, authorization or permit of, or to make any filing with or notification to, any governmental entity other than those provided for in the Transaction Documents and other than any consent, approval, authorization, permit, filing or notification, which, if not made or obtained, would not, individually or in the aggregate, have a material adverse effect on the Purchaser or on its ability to purchase the Seller's Shares from Seller pursuant to this Agreement. (d) Brokers. No broker, finder, or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Purchaser, other than that fee due to Smith Barney which has acted as a financial advisor to Purchaser in connection with the Transactions, which fee shall be paid by, and remain the sole responsibility of, Purchaser in the case of the BSL Merger and Related Transactions and of Golder Thoma in the case of the Investment Transaction, in each case, under the terms of the Transaction Documents. (e) Disclosure. The Proxy Statement does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein in light of the circumstances under which they were made not misleading. True and complete copies of each of the Transaction Documents have been furnished to Seller and there are no other oral or written agreements or commitments relating to the Transactions. (f) Absence of Litigation. There is no claim, action, suit, proceeding or investigation of any kind, at law or in equity (including actions or proceedings seeking injunctive relief), by or before any governmental entity pending or, to the knowledge of Purchaser, threatened against Purchaser or affecting any of 6 7 Purchaser's businesses, assets or rights that would impair Purchaser's ability to consummate the transactions contemplated hereby and Purchaser is not a party or subject to or in default under any judgment, order or decree of any governmental entity that could impair its ability to consummate the transactions under this Agreement. 3. Purchase and Sale of Shares. (a) At the Closing provided for in Section 4 of this Agreement (the "Closing") and subject to the conditions set forth in Section 5 of this Agreement, the Seller will sell, transfer and deliver the Seller's Shares to the Purchaser (duly endorsed for transfer in blank or accompanied by stock transfer powers duly executed in blank, with all necessary stock transfer tax stamps affixed and canceled) and the Purchaser will purchase the Seller's Shares for the following amount: Thirty Million Three Thousand One Hundred Six and no/100 Dollars ($30,003,106), representing an accrued dividend of Two Million Six Hundred Twenty Four Thousand and no/100 Dollars ($2,624,000) and Twenty Seven Million Three Hundred Seventy Nine Thousand One Hundred Six and no/100 Dollars ($27,379,106) as the purchase price for the Seller's Shares. The foregoing assumes that the Closing occurs on or after December 1 and on or before December 15, 1996. In the event the Closing occurs after the date of this Agreement but prior to December 1, the Purchaser will purchase the Seller's Shares for the following amount: Twenty Nine Million Nine Hundred Eighty Seven Thousand One Hundred Six and no/100 Dollars ($29,987,106), representing an accrued dividend of Two Million Five Hundred Ninety Two Thousand and no/100 Dollars ($2,592,000) and Twenty Seven Million Three Hundred Ninety Five Thousand One Hundred Six and no/100 Dollars ($27,395,106) as the purchase price for the Seller's Shares. The foregoing also assumes the costs to the Company of the Senior Living Transaction shall not exceed $500,000. In the event the costs are greater or less than said amount, the amount due to Seller shall be adjusted accordingly. (b) In addition, Seller shall have an interest in Two Million One Hundred Sixty Eight Thousand Eight Hundred Forty Four and no/100 Dollars 7 8 ($2,168,844) of the amounts deposited by the purchasers under the Investment Agreement, the BSL Merger Agreement and the MSL Stock Purchase Agreement in the Escrow Accounts and the Agents/Legal Fees Expense Account created under the terms thereof, each in accordance with the terms of the Investment Agreement, the BSL Merger Agreement and the MSL Stock Purchase Agreement and any escrow agreements executed pursuant thereto and in any distribution which may be made under Section 1.08 of the Investment Agreement. (c) Each of Seller and Purchaser will, upon request of the other, promptly execute and deliver all additional documents reasonably deemed by the requesting party to be necessary, appropriate or desirable to effect, complete and evidence the sale and purchase, assignment, and transfer of the Seller's Shares pursuant to this Agreement. In the event of any change in the number of Seller's Shares outstanding by recapitalization, declaration of a stock split or combination or payment of a stock dividend or the like, the number of Seller's Shares to be transferred to the Purchaser and purchase price to be made to the Seller shall be adjusted accordingly. 4. Closing. The closing of the purchase and sale hereunder shall take place immediately after the consummation of the Investment in accordance with the terms of the Investment Agreement at the offices of Purchaser, or at such other time and place as the parties may mutually agree. At the Closing, Seller shall deliver the Seller's Shares and the Purchaser shall pay the purchase price therefore and the accrued dividends thereon in accordance with the provisions of Section 3 hereof. 5. Conditions. (a) The obligations of each of the parties to this Agreement shall be subject to the satisfaction or waiver, if applicable, at the Closing of each of the following conditions, each of which may be satisfied concurrently: 8 9 (i) the Transactions contemplated by the terms of the Transaction Documents shall have been consummated; and (ii) no order, decree or injunction of a court of competent jurisdiction which prevents the consummation of the transactions contemplated by this Agreement or of the Transactions contemplated by the Transaction Documents shall be in effect. (b) The obligations of the Purchaser under this Agreement shall also be subject to the representations and warranties of the Seller being true, correct and complete in all material respects as of the date hereof and as of the Closing, and the Seller having complied with its covenants hereunder. (c) The obligations of the Seller under this Agreement shall be subject to the representations and warranties of the Purchaser being true, correct and complete in all material respects as of the date hereof and as of the Closing, and the Purchaser having complied with its covenants hereunder. 6. Prohibited Transactions. From the date hereof through the Closing or the earlier termination or expiration of this Agreement, except as provided for herein, the Seller agrees not to: (a) sell, transfer, pledge, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, pledge, assignment or other disposition of any of the Seller's Shares; or (b) grant any proxies, deposit any or all of the Seller's Shares into a voting trust or enter into a voting agreement with respect to any of the Seller's Shares. 7. Termination of Certain Agreements. Each of Seller and Purchaser hereby irrevocably consents to the termination of, and hereby terminates effective upon the purchase of the Seller's Shares at the Closing, the following agreements 9 10 to which Seller and Purchaser are a party and by which Seller and Purchaser or Seller's Shares are or may be bound: (a) That Stock Purchase Agreement dated as of July 16, 1993 between Purchaser and Seller; (b) That Shareholders' Agreement dated as of July 16, 1993 between Purchaser and Seller and the shareholders listed therein (the "GE Shareholders Agreement"); (c) That Registration Rights Agreement dated as of July 16, 1993 between Purchaser and Seller. 8. Waivers and Consents. In consideration for the purchase of the Seller's Shares and the representations and warranties of Purchaser set forth herein, Seller does hereby: (a) Irrevocably waive any right to participate as (i) a member in Encore, (ii) a member in Plaza, (iii) a shareholder in Purchaser or (iv) a general or limited partner in Meridian after the closing of the Transactions; provided, however, that nothing herein shall be construed as a waiver by Seller of its right to participate in the receipt of any funds which may be distributed from the escrow accounts created under the terms of the Investment Agreement, the BSL Merger Agreement and the MSL Stock Purchase Agreement or which may be distributed pursuant to Section 1.08 of the Investment Agreement. Seller acknowledges and agrees that Golder Thoma and/or its designee, Encore, Plaza, CC and Messrs. McAllister and Williams, respectively, are and shall be intended third party beneficiaries of this Section 8. (b) Consent to the transfer, immediately prior to the consummation of the merger of Purchaser and Carryco, Inc. contemplated by the Investment Agreement, by those persons identified in the Investment Agreement as Carryover 10 11 Shareholders of certain of their shares of Purchaser to Carryco, Inc. in accordance with the terms of the Investment Agreement. (c) Consent to the amendment of the Purchaser's Articles of Incorporation to increase the number of authorized preferred shares to include the junior redeemable preferred shares, the junior paid in kind preferred shares and the senior paid in kind preferred shares contemplated by the terms of the Investment Agreement. (d) Waive its right to appoint replacement directors to the Board of Directors of Purchaser in the event of the resignation of the Investor Directors (as defined in the GE Shareholders Agreement) prior to the consummation of the Transactions; provided, however, that this waiver shall expire in the event this Agreement is terminated in accordance with the provisions of Paragraph 13 hereof. (e) Agree to vote in favor of the Transactions in its capacity as a shareholder of Purchaser. 9. Injunctive Relief. Each party hereto acknowledges that money damages would be both incalculable and an insufficient remedy for any breach of this Agreement by such party and that any such breach would cause Purchaser, on the one hand, and Seller, on the other hand, irreparable harm. Accordingly, each party hereto also agrees that, in the event of any breach of the provisions of this Agreement by such party, Purchaser, on the one hand, and Seller, on the other hand, shall be entitled to equitable relief without the requirement of posting a bond or other security, including in the form of injunctions and orders for specific performance in addition to all other remedies available to such other party at law or in equity. 10. Information. Purchaser shall give Seller prompt notice of any amendment to any of the Transaction Documents and of any proposed waiver of any of the conditions to the closing of the Transactions provided for therein. 11 12 11. Indemnification. In connection with the transactions contemplated hereby, each of Seller and Purchaser agrees to indemnify and hold the other harmless from and against any and all damages, claims, liabilities or obligations resulting from any breach by Seller or Purchaser, as the case may be, of any of their respective representations or warranties contained herein. 12. Expenses. Each party hereto shall pay its own expenses incurred in connection with this Agreement. 13. Termination. This Agreement may be terminated by either party hereto at any time after December 15, 1996, if the transactions contemplated hereby have not been consummated prior to such time. Seller may terminate this Agreement if any of the Transaction Documents are amended in any material respect or if any of the conditions to closing provided for therein are waived other than a waiver by the purchasers/investors thereunder or a waiver by Purchaser which is approved by Seller, which approval shall not be unreasonably withheld. In addition, this Agreement will terminate automatically and become null and void without any action by the parties hereto in the event that any of the Transaction Documents is terminated prior to the consummation of the transactions contemplated therein. In the event of termination of this Agreement as provided in this Section, this Agreement shall be null and void (including without limitation, Sections 7 and 8 hereof) provided that nothing contained herein shall relieve any party to this Agreement from liability for breach of this Agreement. 14. Survival. All representations, warranties and agreements made by Seller and Purchaser in this Agreement shall survive the Closing hereunder and any investigation at any time made by or on behalf of any party hereto. 15. Amendment: Modification: Assignment. This Agreement may not be modified, amended, altered or supplemented except upon the execution and delivery of a written agreement executed by the parties hereto. This Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the parties and their respective successors and assigns; provided that, no party to this 12 13 Agreement may assign any of its rights or obligations under this Agreement without the prior consent of the other party. 16. Notices. All notices, claims, requests, demands and other communications hereunder must be in writing and shall be deemed to have been duly given upon receipt as follows: (a) If to Purchaser: Brim, Inc. 305 NE 102nd Avenue Portland, OR 97220 Attention: A.E. Brim with a copy to: Randi S. Nathanson The Nathanson Group 1411 Fourth Avenue Suite 905 Seattle, WA 98101 (b) If to Seller: General Electric Capital Corporation 260 Long Ridge Road Stamford, CT 06927 Attention: Equity Capital Group, Counsel and Risk Management with copy to: Michael Nathan, Esq. Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017-3954 or to such other address as the person to whom notice is to be given may have previously furnished to the other party in writing. 13 14 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 18. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon, regardless of the laws that might otherwise govern under applicable principles of conflicts of law. IN WITNESS WHEREOF, this Preferred Stock Purchase Agreement has been duly executed and delivered by a duly authorized officer of Purchaser and by Seller on the day and year first written above. BRIM, INC. By: /s/ A. E. Brim ------------------------------------- Name: A. E. Brim Title: President GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Patrick J. McNeela ------------------------------------- Name: Patrick J. McNeela Title: Department Operations Manager The undersigned being parties to the GE Shareholder Agreement do hereby consent to the termination thereof pursuant to Paragraph 8 of the foregoing Preferred Stock Purchase Agreement: /s/ A. E. Brim ---------------------------------- A. E. Brim /s/ James M. Williams ---------------------------------- James M. Williams 14 15 /s/ K. David McAllister ------------------------------------- K. David McAllister /s/ John R. Miller ------------------------------------- John R. Miller /s/ Steven R. Taylor ------------------------------------- Steven R. Taylor 15 EX-10.5 10 EMPLOYMENT AGREEMENT BETWEEN TAYLOR AND BRIM 1 Exhibit 10.5 EMPLOYMENT AGREEMENT This Employment Agreement, dated as of 12-17-96, 1996 (this "Agreement"), is made and entered into by and between Steven P. Taylor, an individual resident of the State of Oregon ("Executive"), and Brim, Inc., an Oregon corporation (the "Company"). Recitals 1. The Company desires to secure the services of Executive as an employee of the Company for the period provided in this Agreement. 2. Executive is willing to enter into this Agreement for such period and on the terms and conditions hereinafter set forth. 3. This Agreement is being entered into in connection with the transactions contemplated by that certain Investment Agreement (the "Agreement") dated as 12-17-96, 1996 among the Company, and Golder, Thoma, Cressey, Rauner Fund IV, L.P. and its designees. Agreement In consideration of the promises and covenants herein contained, the Company and Executive hereby agree as follows: Section 1. Employment. During the term of employment set forth in Section 2 of this Agreement, the Company shall employ Executive, and Executive shall serve, as a Senior Vice President of the Company, or shall serve in such other similar capacity, with such other similar title, as the Company shall reasonably determine from time to time consistent with the skills and experience of Executive. Executive agrees to perform faithfully his duties under this Agreement to the best of his ability. SECTION 2. Terms and Place of Employment. Executive's term of employment under this Agreement shall be for a period of three years commencing on the date hereof, unless sooner terminated as provided in Section 8 below (the "Term"). Executive shall perform his duties principally in Portland, Oregon, and shall not be required to change his place of residence in connection with his employment hereunder. The Company maintains its executive offices in Brentwood, Tennessee. Executive may be required from time to travel to Brentwood, Tennessee in the performance of his duties, but shall not be obligated to stay for any extended period in Tennessee. 2 Section 3. Compensation. (a) Base Salary. For all services to be rendered by Executive to the Company under this Agreement, the Company shall pay to Executive the base salary described in Schedule A to this Agreement payable in accordance with the Company's standard payroll practices (the "Base Salary"). (b) Bonus. In addition to the Base Salary, Executive shall be eligible for an annual bonus as described in Schedule A to this Agreement, (the "Bonus"). Section 4. Benefits. During the term of employment hereunder, Executive shall be entitled, to the extent that he is otherwise eligible, to participate in the benefits listed on Schedule A attached hereto with such changes as may be adopted from time to time for all similarly situated officers of the Company. In addition, the Company shall honor any sick leave and vacation time of Executive whether earned or accrued or unpaid as of the date of this Agreement. Section 5. Reimbursement of Expenses. The parties recognize that in the course of performing his duties hereunder, Executive will necessarily incur out-of-pocket expenses for the account of the Company. Executive shall be entitled to reimbursement for all reasonable out-of-pocket expenses so incurred by him in the performance of duties hereunder and in keeping with Company policies, upon submission of an adequate accounting for such expenses. Section 6. Covenant Not to Compete. (a) During the Term of this Agreement, Executive shall not, directly or indirectly, whether as an employee, consultant, partner or in any other corporate or representative capacity, (i) engage in any activity intended to (x) divert from the Company, or from any subsidiary or affiliate, any business of the Company, or any subsidiary or affiliate, relating to any facility owned, leased or managed under a management contract or managed care contract at the time of the termination of Executive's employment or (y) to interfere with any relationship between any facility owned, leased or managed under a management contract or managed care contract at the time of the termination of Executive's employment and any or all of the members of the medical staff thereof (the "Medical Staff"), or (ii) enter into a healthcare related business relationship with any member of any of the Medical Staff. (b) During the Term of this Agreement, Executive shall not directly or indirectly through another entity (i) induce or attempt to induce any 2 3 employees of the Company or any subsidiary to leave the employ of the Company or such subsidiary or in any way interfere with the relationship between the Company or any subsidiary and any employees of the Company or any subsidiary or (ii) hire any more than two persons who were employees of the Company or any subsidiary within a six month period prior to the termination of Executive's employment; provided, however, that the Executive shall not be in breach of its obligations hereunder in the event the event it solicits or hires two or fewer employees or former employees of the Company who would otherwise be subject to the terms of this Section 6(b). (c) It is the intent of the parties that the restrictions contained in this Section 6 shall be reasonable in both duration and geographic scope. If any court of competent jurisdiction shall find the provisions of this Section unreasonable, the restrictions contained in this Section shall be reduced in duration and/or geographic scope to the extent necessary to be deemed reasonable by such court, and shall be enforceable as so modified. Section 7. Confidential Information. (a) The Executive shall not, during the term of his employment or thereafter, without the prior written consent of the Company, divulge, disclose or make accessible to any other person, firm, partnership or corporation, except while employed by the Company in the business of and for the benefit of the Company or when required to do so by a lawful order of a court of competent jurisdiction, Confidential Information (as defined herein). "Confidential Information" shall mean all nonpublic information respecting to the business of the Company and its subsidiaries including, but not limited to, their contracts, leases, management plans, products, research and development, processes, customer lists, marketing plans and strategies. Confidential Information does not include information that is or becomes generally known to and available for use by the public unless such availability occurs through an unauthorized act or omission on the part of Executive. (b) Except as may be otherwise consented to in writing by the Company, at the termination of his employment, all memoranda, diaries, notes, records, cost information, customer lists, marketing plane and strategies, and any other documents containing any Confidential Information made or compiled by, or delivered or made available to, or otherwise obtained by Executive in his possession or subject to his control at such time except that Executive may proffer a legible copy, and retain the original, of any personal diary or personal notes. (c) Executive agrees that the provisions of this Section shall survive the termination of this Agreement. 3 4 Section 8. Termination; Termination Benefits. The term of employment hereunder shall be terminated upon the first to occur of the following: (a) The expiration of the term of employment pursuant to Section 2 of this Agreement; (b) Executive's death or Permanent Disability. "Permanent Disability" shall mean physical or mental incapacity of a nature which prevents Executive, in the judgment of an independent qualified physician of good standing, from performing his duties under this Agreement for a period of three months. If the term of employment is terminated because of Executive's death or Permanent Disability, the Company shall pay (in the case of death) to Executive's beneficiary or beneficiaries designated in writing to the Company, or to Executive's estate in the absence or lapse of such designation, or (in the case of Permanent Disability) to Executive or his representative, any insurance proceeds attributable to Executive's death or disability; (c) Executive's employment being terminated by the Company for Cause. Termination "for Cause" shall mean termination because of: (i) the refusal, neglect or failure without good reason of Executive to perform a major portion of the services to be performed by him under this Agreement, provided Executive shall first have been given written notice of such refusal, neglect or failure and shall fail within thirty (30) days following delivery of such notice to cure such refusal, neglect or failure; (ii) gross negligence or willful misconduct in the performance of Executive's duties hereunder; (iii) the habitual intoxication or inexcusable repeated or prolonged absence from work of Executive; (iv) the perpetration by Executive of a fraud against the Company; or (v) the conviction of Executive of a felony. Termination for Cause shall occur upon delivery to Executive of a written notice of such action by the Company, which written notice shall specify the grounds for such termination. If Executive's employment is terminated for Cause, the Company's only obligation shall be payment of the Base Salary for such period of time as is consistent with the standard practice of the Company; (d) Executive's Voluntary Termination of employment with the Company. "Voluntary Termination" shall mean the termination of Executive's employment with the Company as a result of his resignation or by mutual agreement between Executive and the Company. If Executive's employment is terminated as a result of a Voluntary Termination, the Company's only obligation to Executive shall be payment of the Base Salary for such period of time as is consistent with the standard practice of the Company, but not less than 90 days from the date such termination occurs; or 4 5 SCHEDULE A EXECUTIVE: STEVEN P. TAYLOR TITLE WITHIN THE COMPANY: Senior Vice President COMPENSATION: Executive's Base Salary shall be paid at the rate of $176,000 per year. Executive shall also be entitled to such annual incremental increases in Base Salary as may be given to similarly situated executives of the Company. Executive shall be paid Bonus compensation in an amount equal to fifty percent (50%) of Executive's Base Salary, the payment of which Bonus compensation shall be contingent upon the Company meeting or exceeding its annual target budget. Executive shall be entitled to the advance payment of twenty percent (20%) of Executive's Bonus compensation following the first six months of the first year of the term hereof, if the Company shall have met its target budget for such period. Executive shall be entitled to the standard employee benefits package provided by the Company to Executive immediately prior to consummation of the transaction that is the subject of the Investment Agreement, subject to the Company's right to substitute reasonably comparable alternative benefits; provided, however, Executive shall be entitled to accrue vacation time without limit. Executive shall be entitled to any carry forward and continue, on its existing terms, that certain loan made from U.S. Bank of Oregon to Executive in the amount of $200,000, including the continued payment by the Company of the interest thereon; provided, however, that such loan shall be due and payable in full by no later than the effective date of an initial public offering of the stock of the Company. Executive shall be eligible to participate in any stock option/stock purchase plans or similar equity programs to be developed for key employees. 5 6 If to the Company: c/o Principal Hospital Company 5103 Paddock Village Court Suite A-12 Brentwood, TN 37027 Attn: Martin Rash, President Phone: 615/370-1377 Fax: 615/370-9539 Section 12. Full and Complete Agreement. This Agreement, including the exhibits and schedules hereto constitutes the full and complete understanding and agreement of the parties and supersedes all prior understandings and agreements regarding Executive's employment by the Company or any of its subsidiaries or affiliates. Section 13. Amendment. This Agreement may be modified only by a written instrument executed by both parties. Section 14. Nonassignability. This Agreement and the rights and benefits hereunder are personal to the Company and are not assignable or transferable, nor may the services to be performed hereunder be assigned by the Company to any person, firm or corporation; provided, however, that this Agreement and the rights and benefits hereunder shall be assigned by the Company to any corporation acquiring all or substantially all of the assets of the Company or to any corporation into which the Company may be merged or consolidated, and this Agreement and the rights and benefits hereunder will automatically be deemed assigned to any such corporation without any future action by Executive or the Company. Executive's right and interests under this Agreement may not be assigned, pledged or encumbered by Executive. The provisions of this Agreement shall inure to the benefit of Executive's heirs, executors, administrators and successors in interest. Section 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. Section 16. Execution in Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Section 17. Titles and Headings. Titles and section headings herein are for purposes of reference only, and shall in no way limit, define or otherwise affect the meaning or interpretation of any of the provisions of this Agreement. 6 7 (e) Executive's employment being terminated by the Company without Cause. Termination "without cause" shall mean termination by the Company of Executive's employment on any basis other than those provided in paragraphs (al, (b) (c) or (d) of this Section 8. If the term of employment is terminated without Cause, the Company shall give 10 days written notice thereof to Executive and Executive shall be entitled to receive in full at the time of termination the Base Salary and all Bonus payments as if earned in full, in respect of the unexpired portion of the term of employment in the amounts and at the times provided in Section 3. Section 9. Injunctive Relief. Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if the Executive breaches or threatens to breach the provisions of Section 6 or Section 7 above, and, therefore, agrees that the Company shall be entitled to injunctive relief to prevent any breach or threatened breach of any of those sections, and to specific performance of the terms of each of such sections in addition to any other legal or equitable remedy it may have. Executive further agrees that he shall not, in any equity proceeding involving him relating to the enforcement of Section 6 or Section 7 above, raise the defense that the Company has an adequate remedy at law. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity that it may have or any other rights that it may have under any other instrument. Section 10. Withholding of Taxes. Any payments to Executive, or to his designated beneficiary or beneficiaries, pursuant to the terms of this Agreement shall be reduced by such amounts as may be required to be withheld with respect thereto under all present and future federal, state and local tax laws and regulations and other laws and regulations. Section 11. Notice. Any notice, demand, approval or other communication which may or is required to be given under this Agreement shall be in writing and shall be deemed to have been given on the earlier of the day actually received or on the close of business on the third business day next following the day when deposited in the United States mail, postage prepaid, registered or certified, addressed to the party at the address set forth after its name below or such other address as may be given by such party in writing to the other: If to Executive: Steven P. Taylor 7156 SE Reed College Pl. Portland, OR 97202 7 8 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first set forth above. COMPANY BIRM, INC. By: /s/ --------------------------- Name: ------------------------- Title: ------------------------- EXECUTIVE STEVEN P. TAYLOR /s/ Steven P. Taylor ------------------------------- 8 9 Section 18. Severability. If any portion of this Agreement is deemed invalid or unenforceable for any reason by a court of competent jurisdiction, then such provision will continue in effect only to the extent that is remains valid, and all other provisions in this Agreement in all other respects shall remain valid and enforceable. Section 19. Attorney Fees. In the event that suit or action is instituted to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover his or its attorney fees and costs, including those incurred on appeal, as determined by the court. 9 EX-10.6 11 EMPLOYMENT AGREEMENT BETWEEN BRIM AND BRIM 1 EXHIBIT 10.6 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT, dated as of December 17, 1996 (this "Agreement"), is made and entered into by and between A. E. Brim, an individual resident of the State of Oregon ("Executive"), and Brim, Inc., an Oregon corporation (the "Company"). Recitals 1. The Company desires to secure the services of Executive as an employee of the Company for the period provided in this Agreement. 2. Executive is willing to enter into this Agreement for such period and on the terms and conditions hereinafter set forth. 3. This Agreement is being entered into in connection with the transactions contemplated by that certain Investment Agreement (the "Agreement") dated as of the date hereof among the Company, and Golder, Thoma, Cressey, Rauner, Inc. Agreement In consideration of the promises and covenants herein contained, the Company and Executive hereby agree as follows: Section 1. Employment (a) During the term of employment set forth in Section 2 of this Agreement, the Company shall employ Executive, and Executive shall serve, in the capacity and with the title described in Schedule A to this Agreement, or shall serve in such other similar capacity, with such other similar title, as the Board of Directors of the Company shall reasonably determine from time to time consistent with the skills and experience of Executive. Executive agrees to perform faithfully his duties under this Agreement to the best of his ability. (b) Executive shall perform the duties and have such responsibilities described in Schedule A to this Agreement and/or such additional or other duties as shall be reasonably designated from time to time by the Board of Directors of the Company. Section 2. Term and Place of Employment. Executive's term of employment under this Agreement shall be for a period of three years commencing on the date hereof, unless sooner terminated as provided in Section 8 below. Executive shall perform his duties principally in Portland, Oregon, and shall not be required to change his place of residence in connection with his employment hereunder. 1 2 Section 3. Compensation. For all services to be rendered by Executive to the Company under this Agreement, the Company shall pay to Executive the base salary described in Schedule A to this Agreement payable in accordance with the Company's standard payroll practices (the "Base Salary"). Section 4. Benefits. During the term of employment hereunder, Executive shall be entitled, to the extent that he is otherwise eligible, to participate in the benefits listed on Schedule A attached hereto with such changes as may be adopted from time to time for all similarly situated officers of the Company. In addition, the Company shall honor any sick leave and vacation time of Executive whether earned or accrued and unpaid as of the date of this Agreement. Section 5. Reimbursement of Expenses. The parties recognize that in the course of performing his duties hereunder, Executive will necessarily incur out-of-pocket expenses for the account of the Company. Executive shall be entitled to reimbursement for all reasonable out-of-pocket expenses so incurred by him in the performance of his duties hereunder, upon submission of an adequate accounting for such expenses. Section 6. Covenant Not to Compete. (a) During the term of Executive's Employment, Executive shall not, except as to the personal investments disclosed in Schedule B to this Agreement, directly or indirectly, engage in any business whether as an employee, consultant, partner, principal, agent, representative or stockholder or in any other corporate or representative capacity, if it involves: (i) owning, operating, managing or leasing a business that the Company, or any of its subsidiaries or affiliates, was actively conducting at the time of the termination of Executive's employment with the Company, in competition with the Company or any subsidiary or affiliate, within a 25-mile radius of any facility owned, leased or managed by the Company or any of its Subsidiaries which is engaged in such line of business as the Company or any such subsidiary or affiliate; provided, however, that ownership of less than five percent of the stock of any private or publicly traded corporation shall not be deemed to violate this paragraph; (ii) assisting any other entity to enter into any line of business that the Company or any subsidiary or affiliate was actively conducting at the time of the termination of Executive's employment, within a 25-mile radius of any facility owned, leased or managed by the Company or any of its Subsidiaries which is engaged in such line of business as the Company or any such subsidiary or affiliate; (iii) taking any action within a 25-mile radius of any facility owned, leased or managed by the Company or any of its Subsidiaries to divert from the Company, or from any subsidiary or affiliate, any business in which the Company, or by any subsidiary or affiliate, was already engaged at the time of the termination of Executive's employment; 2 3 (iv) inducing customers, suppliers, agents, franchisees or other persons under contract or franchise or otherwise doing business with the Company and its subsidiaries or affiliates at the time of the termination of Executive's employment, to terminate, reduce or alter business with or from the Company or any subsidiary or affiliate; or (v) substantially causing any executive in the employment of the Company or any of its subsidiaries or affiliates to terminate such employment, accept employment with anyone other than the Company or any subsidiary or affiliate or interfere in any material manner with the business in which the Company or any subsidiary or affiliate was already engaged at the time of the termination of Executive's employment. (b) It is the intent of the parties that the restrictions contained in this Section 6 be reasonable in both duration and geographic scope. If any court of competent jurisdiction shall find the provisions of this Section unreasonable, the restrictions contained in this Section shall be reduced in duration and/or geographic scope to the extent necessary to be deemed reasonable by such court, and shall be enforceable as so modified. Section 7. Confidential Information. (a) The Executive shall not, during the term of his employment or thereafter, without the prior written consent of the Company, divulge, disclose or make accessible to any other person, firm, partnership or corporation, except while employed by the Company in the business of and for the benefit of the Company or when required to do so by a lawful order of a court of competent jurisdiction, Confidential Information (as defined herein). "Confidential Information" shall mean all nonpublic information respecting the business of the Company and its subsidiaries including, but not limited to, their products, research and development, processes, customer lists, marketing plans and strategies. Confidential Information does not include information that is or becomes available to the public unless such availability occurs through an unauthorized act on the part of Executive. (b) Except as may be otherwise consented to in writing by the Company, Executive shall proffer to an appropriate officer of the Company, at the termination of his employment, all memoranda, diaries, notes, records, cost information, customer lists, marketing plans and strategies, and any other documents containing any Confidential Information made or compiled by, or delivered or made available to, or otherwise obtained by Executive in his possession or subject to his control at such time except that Executive may proffer a legible copy, and retain the original, of any personal diary or personal notes. (c) Executive agrees that the provisions of this Section shall survive the termination of this Agreement. Section 8. Termination; Termination Benefits. The term of employment hereunder shall be terminated upon the first to occur of the following: 3 4 (a) The expiration of the term of employment pursuant to Section 2 of this Agreement; (b) Executive's death or permanent disability. "Permanent disability" shall mean physical or mental incapacity of a nature which prevents Executive, in the judgement of an independent qualified physician of good standing, from performing his duties under this Agreement for a period of three months. If the term of employment is terminated because of Executive's death or disability, the Company shall pay (in the case of death) to Executive's beneficiary or beneficiaries designated in writing to the Company, or to Executive's estate in the absence or lapse of such designation, or (in the case of permanent disability) to Executive or his representative, any insurance proceeds attributable to Executive's death or disability; (c) Executive's employment being terminated by the Board of Directors of the Company for Cause. Termination "for Cause" shall mean termination because of: (1) the refusal, neglect or failure without good reason of Executive to perform a major portion of the services to be performed by him under this Agreement, provided Executive shall first have been given notice of such refusal, neglect or failure for a period of thirty (30) days after the delivery to Executive of such notice or shall fail to use reasonable best efforts to cure such refusal, neglect or failure; (2) gross negligence or willful misconduct in the performance of Executive's duties hereunder, (3) the habitual intoxication or inexcusable repeated or prolonged absence from work of Executive; (4) the perpetration by Executive of a fraud against the Company; or (5) the conviction of Executive of a felony. Termination for Cause shall occur upon delivery to Executive a written notice of such action by the Board of Directors of the Company, which written notice shall specify the grounds for such termination. If Executive's employment is terminated for Cause, the Company's only obligation to Executive shall be payment of the Base Salary for such period of time as is consistent with the standard practice of the Company; (d) Executive's voluntary termination of employment with the Company. "Voluntary Termination" shall mean the termination of Executive's employment with the Company as a result of his resignation or by mutual agreement between Executive and the Company. If Executive's employment is terminated as a result of a Voluntary Termination, the Company's only obligation to Executive shall be payment of the Base Salary for such period of time as is consistent with the standard practice of the Company, but not less that 90 days from the date such termination occurs; or (e) Executive's employment being terminated by the Board of Directors of the Company without Cause. Termination "without cause" shall mean termination by the Company of Executive's employment on any basis other than those provided in paragraphs (a), (b), (c) or (d) of this Section 8. If the term of employment is terminated without cause, the Board of Directors of the Company shall give 10 days written notice thereof to Executive and Executive shall be entitled to receive in full at the time of termination the Base Salary as if earned in full, in respect of the unexpired portion of the term of employment in the amounts and at the times provided in Section 3. 4 5 Section 9. Injunctive Relief, Executive acknowledges that Company has no adequate remedy at law and would be irreparably harmed if the Executive breaches or threatens to breach the provisions of Section 6 or Section 7 above, and, therefore, agrees that the Company shall be entitled to injunctive relief to prevent any breach or threatened breach of any of those sections, and to specific performance of the terms of each of such sections in addition to any other legal or equitable remedy it may have. Executive further agrees that he shall not, in any equity proceeding involving him relating to the enforcement of Section 6 or Section 7 above, raise the defense that the Company has an adequate remedy at law. Nothing in this Agreement shall be construed as prohibiting the Company from pursuing any other remedies at law or in equity that it may have or any other rights that it may have under any other agreement. Section 10. Withholding of Taxes. Any payments to Executive, or to his designated beneficiary or beneficiaries, pursuant to the terms of this Agreement shall be reduced by such amounts as may be required to be withhold with respect thereto under all present and future federal, state and local tax laws and regulations and other laws and regulations. Section 11. Notice. Any notice, demand, approval or other communication which may or is required to be given under this Agreement shall be in writing and shall be deemed to have been given on the earlier of the day actually received or on the close of business on the third business day next following the day when deposited in the United States mail, postage prepaid, registered or certified, addressed to the party at the address set forth after its name below or such other address as may be given by such party in writing to the other: If to Executive: A. E. Brim 6666 S. E. Yamhill Portland, OR 97215 If to the Company: c/o Principal Hospital Company 5103 Paddock Village Court Suite A-12 Brentwood, TN 37027 Attn: Martin Rash, President Phone: 615-370-1377 Fax: 615-370-9539 Section 12. Full and Complete Agreement. This Agreement, including the 5 6 exhibits and schedules hereto constitutes the full and complete understanding and agreement of the parties and supersedes all prior understandings and agreements regarding Executive's employment by the Company, Brim or any of their respective subsidiaries or affiliates. Section 13. Amendment. This Agreement may be modified only by a written instrument executed by both parties. Section 14. Nonassignability. This Agreement and the rights and benefits hereunder are personal to the Company and are not assignable or transferable, nor may the services to be performed hereunder be assigned by the Company to any person, firm or corporation; provided, however, that this Agreement and the rights and benefits hereunder shall be assigned by the Company to any corporation acquiring all or substantially all of the assets of the Company or to any corporation into which the Company may be merged or consolidated, and this Agreement and the rights and benefits hereunder will automatically be deemed assigned to any such corporation without any future action by Executive or the Company. Executive's right and interests under this Agreement may not be assigned, pledged or encumbered by Executive. The provisions of this Agreement shall inure to the benefit of Executive's heirs, executors, administrators and successors in interest. Section 15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. Section 16. Execution in Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Section 17. Titles and Headings. Titles and section headings herein are for purposes of reference only, and shall in no way limit, define or otherwise affect the meaning or interpretation of any of the provisions of this Agreement. Section 18. Severability. If any portion of this Agreement is deemed invalid or unenforceable for any reason by a court of competent jurisdiction, then such provision will continue in effect only to the extent that it remains valid, and all other provisions in this Agreement in all other respects shall remain valid and enforceable. Section 19. Attorney Fees. In the event that suit or action is instituted to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to recover his or its attorney fees and costs, including those incurred on appeal, as determined by the court. 6 7 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first set forth above. BRIM, INC. By /s/ -------------------------- Name: Title: /s/ A. E. Brim --------------------------- A. E. Brim 7 8 SCHEDULE A EMPLOYEE: A. E. BRIM BASIC DUTIES AND RESPONSIBILITIES: Executive shall assist in the transition contemplated under the Investment Agreement, and such other duties and responsibilities, commensurate with his skills and experience, as he may be from time to time be called upon to perform. Executive shall be available on a half time basis, the timing of which availability shall be mutually agreed upon by the parties. Executive shall also serve as a member of the Board of Directors of Principal Hospital Company, it being understood that his duties as an employee are separate therefrom. TITLE WITHIN THE COMPANY: Director of Principal Hospital Company and Chairman Emeritus. COMPENSATION: 1. Employment Date = 10/01/71 2. Executive's base salary shall be paid at the rate of $121,680.00 per year. Executive shall also be entitled to such annual incremental increases as may be given to similarly situated executives of the Company. 3. Executive shall be entitled to retain the standard employee benefits package provided by the Company to Executive immediately prior to the consummation of the transaction which is the subject of the Investment Agreement. Such benefits shall not be reduced due to or as a result of Executive's contemplated half-time status. Executive shall be entitled to participate in any stock option/stock purchase plans or similar equity programs to be developed for key employees pursuant to Section 6.03(a)(ii) of the Investment Agreement or otherwise. Executive shall retain his current office located in the Brim, Inc. corporate office in Portland, Oregon, and shall be provided such secretarial support as may be appropriate and necessary for Executive to carry out his duties and responsibilities. Executive shall be entitled to retain his current combined automobile and expense 8 9 (SCHEDULE A Cont.) allowance in the amount of $600.00 per month, and the Company shall pay the dues associated with Executive's membership in the Portland Arlington Club. 9 EX-10.15 12 LEASE AND SECURITY AGREEMENT DATED 4-11-94 1 EXHIBIT 10.15 Lease and Security Agreement by and between Nationwide Health Properties, Inc., a Maryland corporation, as "Landlord" and Brim Hospitals, Inc., an Oregon corporation as "Tenant" Dated April 11, 1994 2 TABLE OF CONTENTS Page 1. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Renewal Terms . . . . . . . . . . . . . . . . . . . . . . . 2 2. Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1 Initial Term Minimum Rent . . . . . . . . . . . . . . . . 3 2.2 Initial Term Additional Rent . . . . . . . . . . . . . . . 3 2.3 Renewal Term Minimum Rent . . . . . . . . . . . . . . . . . 5 2.4 Renewal Term Additional Rent . . . . . . . . . . . . . . . 6 2.5 Total Rent . . . . . . . . . . . . . . . . . . . . . . . . 6 2.6 Rent Cap and Rent Floor . . . . . . . . . . . . . . . . . . 6 2.7 Proration for Partial Periods . . . . . . . . . . . . . . . 9 2.8 Absolute Net Lease . . . . . . . . . . . . . . . . . . . . 9 3. Taxes, Assessments and Other Charges . . . . . . . . . . . . . . 10 3.1 Tenant's Obligations . . . . . . . . . . . . . . . . . . . 10 3.2 Proration . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.3 Right to Protest . . . . . . . . . . . . . . . . . . . . . 10 3.4 Tax Bills . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.5 Other Charges . . . . . . . . . . . . . . . . . . . . . . . 10 4. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.1 General Insurance Requirements . . . . . . . . . . . . . . 11 4.2 Fire and Extended Coverage . . . . . . . . . . . . . . . . 11 4.3 Public Liability . . . . . . . . . . . . . . . . . . . . . 12 4.4 Professional Liability Insurance . . . . . . . . . . . . . 13 4.5 Workers Compensation . . . . . . . . . . . . . . . . . . . 13 4.6 Boiler Insurance . . . . . . . . . . . . . . . . . . . . . 14 4.7 Business Interruption Insurance . . . . . . . . . . . . . . 14 5. Use, Maintenance and Alteration of the Premises. . . . . . . . . 15 5.1 Tenant's Maintenance Obligations . . . . . . . . . . . . . 15 5.2 Regulatory Compliance . . . . . . . . . . . . . . . . . . . 15 5.3 Permitted Use . . . . . . . . . . . . . . . . . . . . . . . 16 5.4 Tenant Repurchase Obligation . . . . . . . . . . . . . . . 17 5.5 No Liens; Permitted Contests . . . . . . . . . . . . . . . 18 5.6 Alterations by Tenant . . . . . . . . . . . . . . . . . . . 18 5.7 Capital Improvements Funded by Landlord . . . . . . . . . . 20 5.8 Compliance With IRS Guidelines . . . . . . . . . . . . . . 21 5.9 Option to Reqacuire . . . . . . . . . . . . . . . . . . . . 21 6. Condition And Title Of Premises . . . . . . . . . . . . . . . . 24 7. Landlord and Tenant Personal Property . . . . . . . . . . . . . 25 7.1 Tenant Personal Property . . . . . . . . . . . . . . . . . 25 7.2 Landlord's Security Interest . . . . . . . . . . . . . . . 26 7.3 Financing Statements . . . . . . . . . . . . . . . . . . . 27 7.4 Intangible Property . . . . . . . . . . . . . . . . . . . . 28 7.5 Option to Purchase . . . . . . . . . . . . . . . . . . . . 29 i 3 8. Representations And Warranties . . . . . . . . . . . . . . . . . . . 29 8.1 Due Authorization And Execution . . . . . . . . . . . . . . . . 29 8.2 Due Organization . . . . . . . . . . . . . . . . . . . . . . . 29 8.3 No Breach of Other Agreements . . . . . . . . . . . . . . . . . 29 9. Financial, Management and Regulatory Reports . . . . . . . . . . . . 29 9.1 Monthly Facility Reports . . . . . . . . . . . . . . . . . . . 29 9.2 Quarterly Financial Statements . . . . . . . . . . . . . . . . 30 9.3 Annual Financial Statement . . . . . . . . . . . . . . . . . . 30 9.4 Accounting Principles . . . . . . . . . . . . . . . . . . . . . 30 9.5 Regulatory Reports . . . . . . . . . . . . . . . . . . . . . . 30 10. Events of Default and Landlord's Remedies . . . . . . . . . . . . . 31 10.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . 35 10.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 10.3 Receivership . . . . . . . . . . . . . . . . . . . . . . . . . 37 10.4 Late Charges . . . . . . . . . . . . . . . . . . . . . . . . . 38 10.5 Remedies Cumulative; No Waiver . . . . . . . . . . . . . . . . 38 10.6 Performance of Tenant's Obligations by Landlord . . . . . . . . 39 11. Security Deposit . . . . . . . . . . . . . . . . . . . . . . . . . . 40 12. Damage by Fire or Other Casualty . . . . . . . . . . . . . . . . . . 40 12.1 Reconstruction Using Insurance . . . . . . . . . . . . . . . . 40 12.2 Surplus Proceeds . . . . . . . . . . . . . . . . . . . . . . . 41 12.3 No Rent Abatement . . . . . . . . . . . . . . . . . . . . . . . 41 13. Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 13.1 Complete Taking . . . . . . . . . . . . . . . . . . . . . . . . 41 13.2 Partial Taking . . . . . . . . . . . . . . . . . . . . . . . . 42 13.3 Cap on Awards . . . . . . . . . . . . . . . . . . . . . . . . 43 13.4 Lease Remains in Effect . . . . . . . . . . . . . . . . . . . . 43 14. Provisions on Termination of Term . . . . . . . . . . . . . . . . . 43 14.1 Surrender of Possession . . . . . . . . . . . . . . . . . . . . 43 14.2 Removal of Personal Property . . . . . . . . . . . . . . . . . 43 14.3 Title to Personal Property Not Removed . . . . . . . . . . . . 44 14.4 Management of Premises . . . . . . . . . . . . . . . . . . . . 44 14.5 Correction of Deficiencies . . . . . . . . . . . . . . . . . . 44 15. Notices and Demands . . . . . . . . . . . . . . . . . . . . . . . . 45 16. Right of Entry; Examination of Records . . . . . . . . . . . . . . . 46 17. Landlord May Grant Liens . . . . . . . . . . . . . . . . . . . . . . 46 18. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . 47 19. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 20. Preservation of Gross Revenues . . . . . . . . . . . . . . . . . . . 49 21. Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . 49 21.1 Hazardous Material Covenants . . . . . . . . . . . . . . . . . 49 ii 4 21.2 Tenant Notices to Landlord . . . . . . . . . . . . . . . . . 50 21.3 Extension of Term . . . . . . . . . . . . . . . . . . . . . 50 21.4 Participation in Hazardous Materials Claims . . . . . . . . 51 21.5 Environmental Activities . . . . . . . . . . . . . . . . . . 51 21.6 Hazardous Materials . . . . . . . . . . . . . . . . . . . . 51 21.7 Hazardous Materials Claims . . . . . . . . . . . . . . . . . 52 21.8 Hazardous Materials Laws . . . . . . . . . . . . . . . . . . 52 21.9 Remediation of Existing Environmental Condition . . . . . . 53 22. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . 53 23. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . 56 24. Holding Over . . . . . . . . . . . . . . . . . . . . . . . . . . 57 25. Estoppel Certificates . . . . . . . . . . . . . . . . . . . . . . 57 26. Conveyance by Landlord . . . . . . . . . . . . . . . . . . . . . 58 27. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . 58 28. Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . 58 29. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . 59 30. Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . 59 31. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . 59 32. Waiver and Subrogation . . . . . . . . . . . . . . . . . . . . . 59 33. Memorandum of Lease . . . . . . . . . . . . . . . . . . . . . . . 59 34. Incorporation of Recitals and Attachments . . . . . . . . . . . . 60 35. Titles and Headings . . . . . . . . . . . . . . . . . . . . . . . 60 36. Usury Savings Clause . . . . . . . . . . . . . . . . . . . . . . 60 37. Joint and Several . . . . . . . . . . . . . . . . . . . . . . . . 60 38. Survival of Representations, Warranties and Covenants . . . . . . 60 39. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . 61 EXHIBIT A Legal Description . . . . . . . . . . . . . . . . . . . . . A-1 EXHIBIT B Landlord Personal Property . . . . . . . . . . . . . . . . . B-1 EXHIBIT C Calculation of Additional Rent . . . . . . . . . . . . . . . C-1 EXHIBIT D Appraisal Process . . . . . . . . . . . . . . . . . . . . . D-1 EXHIBIT E Permitted Exceptions . . . . . . . . . . . . . . . . . . . . E-1 iii 5 EXHIBIT F Additional Rent Calculations . . . . . . . . . . . . . . . . . F-1 EXHIBIT G ALTA Survey . . . . . . . . . . . . . . . . . . . . . . . . . G-1 iv 6 LEASE AND SECURITY AGREEMENT THIS LEASE AND SECURITY AGREEMENT ("Lease") is made and entered into as of the 11th day of April, 1994 by and between Nationwide Health Properties, Inc., a Maryland corporation ("Landlord"), and Brim Hospitals, Inc., an Oregon corporation ("Tenant"). W I T N E S S E T H: WHEREAS, Landlord is the owner of that certain real property, all improvements thereon and all appurtenances thereto, presently licensed as a one hundred sixteen (116) bed hospital, located at 1306 Maricopa Highway, ojai, California and more specifically described in Exhibit "A" attached hereto, together with certain of the furniture, machinery, equipment, appliances, fixtures, supplies and other personal property used in connection therewith as more specifically described on Exhibit "B" attached hereto ("LANDLORD PERSONAL PROPERTY"). The foregoing property owned by Landlord shall be collectively referred to in this Lease as the "PREMISES"; and WHEREAS, Brim, Inc., an Oregon corporation ("GUARANTOR") has agreed to guarantee Tenant's obligations under this Lease; and WHEREAS, Landlord desires to lease the Premises to Tenant, and Tenant desires to lease the Premises from Landlord. NOW THEREFORE, in consideration of the mutual covenants, conditions and agreements set forth herein, Landlord hereby 1 7 leases and lets unto Tenant the Premises for the term and upon the conditions and provisions hereinafter set forth. 1. TERM. 1.1 TERM. The term of this Lease shall commence on April 14, 1994 and shall end on May 30, 2004 (the "INITIAL TERM") unless extended pursuant to Section 1.2 or earlier terminated in accordance with the provisions hereof. The Initial Term and all renewal terms are referred to collectively as the "TERM". 1.2 RENEWAL TERMS. The Term may be extended for two (2) separate renewal terms of ten (10) years each, upon the satisfaction of all of the following terms and conditions: 1.2.1 Not more than five (5) days before or after the date which is twelve (12) months prior to the end of the then current Term, Tenant shall give Landlord written notice that Tenant desires to exercise its right to extend the then current Term for one (1) renewal term. 1.2.2 There shall be no Event of Default under this Lease, either on the date of Tenant's notice to Landlord pursuant to Section 1.2.1 above, or on the last day of the then current Term. 1.2.3 All other provisions of this Lease shall remain in full force and effect and shall continuously apply throughout the renewal term(s). 2 8 2. RENT. During the Initial Term and all renewal terms Tenant shall pay to Landlord minimum rent ("MINIMUM RENT") and additional rent ("ADDITIONAL RENT") as follows: 2.1 INITIAL TERM MINIMUM RENT. During the first Lease Year of the Initial Term Tenant shall pay to Landlord Minimum Rent of $407,247 annually. During the second and all subsequent Lease Years of the Initial Term Tenant shall pay to Landlord Minimum Rent of $419,464 annually. Such Minimum Rent shall be paid in advance on the first business day of each calendar month in equal monthly installments of $33,937.25 each during the first Lease Year of the Initial Term and $34,955.33 each during the second and all subsequent Lease Years of the Initial Term. If Landlord funds any additional improvements pursuant to Section 5.7 below, during the first Lease Year such annual Minimum Rent shall be increased by an amount equal to nine and 362/1000 percent (9.362%) of the amount advanced by Landlord with a corresponding increase to the monthly payment amount, and during all subsequent Lease Years of the Initial Term such annual Minimum Rent shall be increased by an amount equal to nine and 643/1000 percent (9.643%) of the amount advanced by Landlord with a corresponding increase to the monthly payment amount. 2.2 INITIAL TERM ADDITIONAL RENT. 2.2.1 Commencing with the third Lease Year, and continuing during the Initial Term, Tenant agrees to pay Additional Rent to Landlord on a quarterly basis in arrears no more than 45 days after the end of each calendar quarter. Such Additional Rent shall be equal to two and one-half percent (2.5%) of the amount by 3 9 which the Gross Revenues for the Lease Year through the applicable quarter exceed the prorated Gross Revenues for the applicable portion of the Base Year. Tenant shall accompany each payment of Additional Rent with a completed calculation in the form of Exhibit "C" attached hereto. 2.2.2 "GROSS REVENUES" shall be calculated according to generally accepted accounting principles consistently applied ("GAAP") and shall be defined as all revenues generated by the operation, sublease and/or use of the Premises in any way, excluding (i) contractual allowances during the Term for billings not paid by or received from the appropriate governmental agencies or third party providers; (ii) all proper patient billing credits and adjustments according to GAAP relating to health care accounting; and (iii) federal, state or local sales or excise taxes and any tax based upon or measured by said revenues which is added to or made a part of the amount billed to the patient or other recipient of such services or goods, whether included in the billing or stated separately. 2.2.3 "LEASE YEAR" shall be defined as the twelve (12) month periods commencing on May 1 of each year of the Term. 2.2.4 The "BASE YEAR" during the Initial Term shall mean the year ending on April 30, 1996. 4 10 2.3 RENEWAL TERM MINIMUM RENT. The Minimum Rent for each renewal term shall be expressed as an annual amount but shall be payable in advance in equal monthly installments on the first business day of each calendar month. Such annual Minimum Rent shall be equal to the product of: 2.3.1 the greater of (i) the fair market value of the Premises on the date of Tenant's notice of exercise pursuant to Section 1.2.1, but not to exceed Landlord's Original Investment ($4,350,000) (as increased under Section 5.7 below, if applicable) increased by three percent (3%) per annum compounded annually or (ii) Landlord's Original Investment ($4,350,000) as increased under Section 5.7 below, if applicable; and 2.3.2 a percentage equal to three hundred fifty (350) basis points over the 10 year United States Treasury rate in effect on the date of Tenant's notice of exercise pursuant to Section 1.2.1. If within ten (10) days of the date of Tenant's notice of exercise pursuant to Section 1.2.1, Landlord and Tenant are unable to agree on the fair market value of the Premises for purposes of this calculation, such fair market value shall be established by the appraisal process described on Exhibit "D" attached hereto. The Minimum Rent for the applicable renewal term must be finally determined by such appraisal process on or before a date ninety (90) days after Tenant's notice of exercise 5 11 pursuant to section 1.2.1 or Tenant shall lose its right to extend the Term. Landlord and Tenant acknowledge and agree that this Section is designed to establish a fair market Minimum Rent for the Premises during the applicable renewal terms. 2.4 RENEWAL TERM ADDITIONAL RENT. During each renewal term, Tenant shall pay to Landlord Additional Rent on a quarterly basis in arrears no more than 45 days after the end of each calendar quarter. The Additional Rent for each renewal term shall be calculated as provided in Section 2.2 except that the Base Year for the purpose of determining such Additional Rent shall be the Lease Year immediately preceding the applicable renewal term. 2.5 TOTAL RENT. For all purposes of calculating and paying Minimum Rent and Additional Rent under this Lease, the total of the Minimum Rent plus Additional Rent payable by Tenant in any Lease Year will not be less than the total Minimum Rent plus Additional Rent paid by Tenant for the previous Lease Year. 2.6 RENT CAP AND RENT FLOOR. 2.6.1 Notwithstanding any of the other terms of this Lease but subject to Sections 2.6.2 and 2.6.4, the total of the Minimum Rent and Additional Rent due during each Lease Year shall not: during the third Lease Year of the Initial-Term exceed $432,048 plus the product of .09933 times capital improvements funded by Landlord pursuant to Section 5.7 of this Lease; and in all subsequent Lease Years increase from one Lease Year to the next by an amount in excess of (i) the applicable percentage, multiplied by (ii) the sum of the Minimum Rent and the Additional Rent due during the immediately preceding Lease 6 12 Year. As used in the foregoing, the "applicable percentage" shall be three percent (3%) in the fourth Lease Year of the Initial Term and three and one-half percent (3.5%) in all subsequent Lease Years. 2.6.2 The terms of Section 2.6.1 shall have no applicability in determining the Minimum Rent to be calculated for any renewal term pursuant to Section 2.3 above. However, the terms of Section 2.6.1 shall apply in calculating total rent from one year to the next within a renewal term. 2.6.3 Notwithstanding any of the other terms of the Lease but subject to Section 2.6.4, in no event shall the total of Minimum Rent plus Additional Rent in the first Lease Year of any renewal term exceed one hundred fifteen percent (115%) of the total of the Minimum Rent plus Additional Rent paid or payable for the last Lease Year in the Initial Term or preceding renewal term, as applicable. 2.6.4 Notwithstanding any of the other terms of this Section 2.6, the terms of Section 2.5 shall continue to apply such that the sum of the Minimum Rent and the Additional Rent due during any Lease Year shall in no event be less than the sum of the Minimum Rent and the Additional Rent due during the immediately preceding Lease Year. 2.6.5 To the extent that Section 2.6.1 operates to limit the rent for any Lease Year, the amount of rent which would have otherwise been paid or payable by Tenant will be carried forward on a cumulative basis and 7 13 will be paid by Tenant to Landlord in any subsequent Lease Year (other than the first Lease Year of a renewal term) in which the total of the Minimum Rent and Additional Rent is less than the applicable percentage of the total of the Minimum Rent and Additional Rent for the then immediately preceding Lease Year. 2.6.6 To the extent that Section 2.6.3 operates to limit the Minimum Rent for the first renewal term, the amount of rent which would have otherwise been paid or payable by Tenant in such first renewal term will be carried forward and will be paid in the second renewal term (evenly divided over all of the months in such second renewal term) to the extent that the Minimum Rent for such second renewal term is less than one hundred fifteen percent (115%) of the total of the Minimum Rent and Additional Rent for the last Lease Year in the first renewal term. 2.6.7 Within sixty (60) days of the end of each Lease Year, Tenant shall deliver to Landlord a report in the form attached hereto as Exhibit F. certified by an officer or general partner of Tenant, as applicable, setting forth the calculations set forth therein. If said report provides that Tenant owes Landlord any sum of money, Tenant shall accompany such report delivered to Landlord with such funds. If said report provides that Landlord owes Tenant any sum of money, such sum shall be applied as a credit against future installments of Minimum Rent and Additional Rent due from Tenant to Landlord: provided, however. if such sum is 8 14 owed by Landlord to Tenant with respect to the last year of the Lease Term, Landlord shall pay such sum to Tenant within thirty (30) days of Landlord's receipt of the report in question. 2.7 PRORATION FOR PARTIAL PERIODS. The rent for any month during the Term which begins or ends on other than the first or last calendar day of a calendar month shall be prorated based on actual days elapsed. 2.8 ABSOLUTE NET LEASE. All rent payments shall be absolutely net to the Landlord free of taxes (as described in Section 3.1 hereof), assessments, utility charges, operating expenses, refurnishings insurance premiums or any other charge or expense in connection with the Premises. All expenses and charges, whether for upkeep, maintenance, repair, refurnishing, refurbishing, restoration, replacement, insurance premiums, taxes, utilities, and other operating or other charges of a like nature or otherwise, shall be paid by Tenant. This provision is not in derogation of the specific provisions of this Lease, but in expansion thereof and as an indication of the general intentions of the parties hereto. Tenant shall continue to perform its obligations under this Lease even if Tenant claims that Tenant has been damaged by any act or omission of Landlord. Therefore, Tenant shall at all times remain obligated under this Lease without any right of set-off, counterclaim, abatement, deduction, reduction or defense of any kind, except in the event that Landlord breaches its obligations under Section 18 or as otherwise expressly provided therein. Tenant's sole right to 9 15 recover damages against Landlord by reason of a breach or alleged breach of Landlord's obligations under this Lease shall be to prove such damages in a separate action against Landlord. 3. TAXES. ASSESSMENTS AND OTHER CHARGES: 3.1 TENANT'S OBLIGATIONS. Tenant agrees to pay and discharge (including the filing of all required returns) any and all taxes (including but not limited to real estate and personal property taxes, business and occupational license taxes, ad valorem sales, use, single business, gross receipts, transaction privilege, rent or other excise taxes) and other assessments levied or assessed against the Premises or any interest therein during the Term, prior to delinquency or imposition of any fine, penalty, interest or other cost. 3.2 PRORATION. At the commencement and at the end of the Term, all such taxes and assessments shall be prorated. 3.3 RIGHT TO PROTEST. Landlord and/or Tenant shall have the right, but not the obligation, to protest the amount or payment of any real or personal property taxes or assessments levied against the Premises; provided that in the event of any protest by Tenant, Landlord shall not incur any expense because of any such protest, Tenant shall diligently and continuously prosecute any such protest and notwithstanding such protest Tenant shall pay any tax, assessment or other charge before the imposition of any penalty or interest. 3.4 TAX BILLS. Landlord shall promptly forward to Tenant copies of all tax bills and payment receipts relating to the Premises received by Landlord. 10 16 3.5 OTHER CHARGES. Tenant agrees to pay and discharge, punctually as and when the same shall become due and payable without penalty, all electricity, gas, garbage collection, cable television, telephone, water, sewer, and other utilities costs and all other charges, obligations or deposits assessed against the Premises during the Term. 4. INSURANCE. 4.1 GENERAL INSURANCE REQUIREMENTS. Except as set forth herein, all insurance provided for in this Lease shall be maintained under valid and enforceable policies issued by insurers or reinsurers of recognized responsibility, licensed (either admitted or not admitted) to do business in the State of California, having a general policyholders rating of not less than "A minus", a financial rating of not less than "Class V" in the then most current Best's Insurance Report, and an overall performance rating of "excellent." Any and all policies of insurance required under this Lease shall name the Landlord as an additional insured and shall be on an "occurrence" basis, or if on a "claims made" basis the Tenant shall provide for the purchase of a one year tail at the expiration of the "claims made" policy in question. In addition, Landlord shall be shown as the loss payable beneficiary under the property insurance policy maintained by Tenant pursuant to Section 4.2. All policies of insurance required herein may be in the form of "blanket" or "umbrella" type policies which shall name the Landlord and Tenant as their interests may appear and allocate to the Premises the full amount of insurance required hereunder. 11 17 Original policies or satisfactory certificates from the insurers evidencing the existence of all policies of insurance required by this Lease and showing the interest of the Landlord shall be filed with the Landlord prior to the commencement of the Term and shall provide that the subject policy may not be canceled except upon not less than ten (10) days prior written notice to Landlord. Originals of the renewal policies or certificates therefor from the insurers evidencing the existence thereof shall be deposited with Landlord not less than ten (10) days prior to the expiration dates of the policies. Any claims under any policies of insurance described in this Lease shall be adjudicated by and at the expense of the Tenant or of its insurance carrier, but shall be subject to joint control of Tenant and Landlord. 4.2 FIRE AND EXTENDED COVERAGE. Tenant shall keep the Premises insured against loss or damage by fire, with extended coverage endorsement covering loss or damage, by lightning, windstorm, explosion, smoke damage, vehicle damage, sprinkler leakage, flood, vandalism, earthquake (if within an earthquake zone Tenant will provide earthquake insurance as soon as practicable after the commencement of the Initial Term), malicious mischief and such other risks as are normally covered under such endorsement in the amounts that are not less than the full insurable value of the Premises including all equipment and personal property (whether or not Landlord Personal Property) used in the operation of the Premises, but in no event less than Seven Million Six Hundred Thousand Dollars ($7,600,000). The term "FULL INSURABLE VALUE" as used in this Lease shall mean the greater of (i) Seven Million Six Hundred Thousand Dollars 12 18 ($7,600,000) or (ii) Landlord's Original Investment ($4,350,000) (as increased under Section 5.7 below, if applicable) increased by three percent (3%) per annum compounded annually from the date of this Lease. 4.3 PUBLIC LIABILITY. Tenant shall maintain general public liability insurance (including products liability coverage) against claims for bodily injury, death or property damage occurring on, in or about the Premises and the adjoining sidewalks and passageways, such insurance to afford protection to Landlord and Tenant of not less than Five Million Dollars ($5,000,000) with respect to bodily injury or death to any one person, not less than Five Million Dollars ($5,000,000) with respect to any one accident, and not less than One Million Dollars ($1,000,000) with respect to property damage; provided, that Landlord shall have the right at any time hereafter to require such higher limits as may be reasonable and customary for transactions and properties similar to the Premises. 4.4 PROFESSIONAL LIABILITY INSURANCE. Tenant shall maintain insurance against liability imposed by law upon Tenant and its Affiliates for damages on account of professional services rendered or which should have been rendered by Tenant or its Affiliates or any person for which acts Tenant or its Affiliates is legally liable on account of injury, sickness or disease, including death at any time resulting therefrom, and including damages allowed for loss of service, in a minimum amount of Five Million Dollars ($5,000,000) for each claim and One Hundred Million Dollars ($100,000,000) in the aggregate. In 13 19 the alternative, Tenant shall participate in the professional liability insurance program provided by the California Hospital Insurance Company, which provides professional liability insurance in an amount of not less than Five Million Dollars ($5,000,000) for each claim. 4.5 WORKERS COMPENSATION. Tenant shall comply with all legal requirements regarding worker's compensation, including any requirement to maintain worker's compensation insurance against claims for injuries sustained by Tenant's employees in the course of their employment. 4.6 BOILER INSURANCE. If required by Landlord in its reasonable discretion, Tenant shall maintain boiler and pressure vessel insurance on any fixtures or equipment which are capable of bursting or exploding, in an amount not less than Five Million Dollars ($5,000,000) for damage to property, bodily injury or death resulting from such perils. 4.7 BUSINESS INTERRUPTION INSURANCE. Tenant shall maintain, at its expense, business interruption insurance insuring against loss of rental value for a period not less than one (1) year. [Remainder of page intentionally left blank] 14 20 5. Use, Maintenance and Alteration of the Premises. 5.1 Tenant's Maintenance Obligations. 5.1.1 Tenant will keep and maintain the Premises in good appearance, repair and condition and maintain proper housekeeping. Tenant shall promptly make or cause to be made all repairs, interior and exterior, structural and nonstructural, ordinary and extraordinary, foreseen and unforeseen necessary to keep the Premises in good and lawful order and condition and in substantial compliance with all requirements for the licensing of hospitals (and nursing homes if the Premises are subject to a nursing home license) in the State of California and certification for participation in Medicare and MediCal (or any successor programs) or as otherwise required under all applicable local, state and federal laws. 5.1.2 As part of Tenant's obligations under this Section 5.1, Tenant shall be responsible to maintain, repair and replace all Landlord Personal Property and all Tenant Personal Property in good condition, ordinary wear and tear excepted, consistent with prudent industry practice. 5.2 REGULATORY COMPLIANCE. 5.2.1 Tenant and the Premises shall comply with all federal, state and local licensing and other laws and regulations applicable to hospitals (and nursing homes if the Premises are subject to a nursing 15 21 home license) as well as with the certification requirements of Medicare and MediCal (or any successor program). Further, Tenant shall ensure that the Premises continue to be licensed as a hospital with a licensed capacity of 116 beds fully certified for participation in Medicare and MediCal (or any successor program) throughout the Term and at the time the Premises are returned to Landlord at the termination thereof, all without any suspension, revocation, decertification or limitation. Further, Tenant shall not commit any act or omission that would in any way violate any certificate of occupancy affecting the Premises. 5.2.2 All inspection fees, costs and charges associated with a change of such licensure or certification shall be borne solely by Tenant. Tenant shall at its sole cost make any additions or alterations to the Premises necessitated by, or imposed in connection with, a change of ownership inspection survey for the transfer of operation of the Premises from Tenant or Tenant's assignee or subtenant to Landlord or Landlord's designee at the expiration or termination of the Term. 5.3 PERMITTED USE. Tenant shall continuously use and occupy the Premises during the Term, solely as a 116 bed licensed hospital. 16 22 5.4 TENANT REPURCHASE OBLIGATION. If Tenant fails to comply with Section 5.3, if the certification of the Premises under Medicare or MediCal (or any successor program) is revoked, suspended or materially limited, or if the hospital (or nursing home license, if any) of the Premises is revoked, suspended or materially limited, then in addition to Landlord's other rights and remedies under this Lease, Landlord shall have the right to put the Premises to Tenant. If Landlord exercises such right, Tenant shall purchase the Premises from Landlord for a cash price equal to the greater of Landlord's Original Investment ($4,350,000) as increased under Section 5.7 below, if applicable or the fair market value of the Premises on the date of Landlord's notice of exercise; provided, however, in no event shall the cash price exceed Landlord's Original Investment ($4,350,000) (as increased under Section 5.7 below, if applicable) increased by three percent (3%) per annum compounded annually. Such fair market value shall be as agreed between Landlord and Tenant. However, failing such agreement within ten (10) days of Landlord's notice of exercise under this Section, such fair market value shall be determined by the appraisal process set forth in Exhibit "D" attached hereto. Within ninety (90) days of Landlord's exercise of its put under this Section 5.4, such purchase shall be consummated utilizing an escrow at a national title company selected by Landlord. Such escrow shall be documented on such title company's standard sale escrow instructions without representations or warranties and without any due diligence or other contingencies in favor of the buyer. 17 23 Tenant shall pay all costs of such sale transaction. At the close of such sale, Landlord shall deliver to Tenant title to the Premises subject only to those title exceptions shown on Exhibit "E" attached hereto. 5.5 No Liens: Permitted Contests. Tenant shall not cause or permit any liens, levies or attachments to be placed or assessed against the Premises or the operation thereof for any reason. However, Tenant shall be permitted in good faith and at its expense to contest the existence, amount or validity of any lien upon the Premises by appropriate proceedings sufficient to prevent the collection or other realization of the lien or claim so contested, as well as the sale, forfeiture or loss of any of the Premises or any rent to satisfy the same. Tenant shall provide Landlord with security satisfactory to Landlord in Landlord's reasonable judgment to assure the foregoing. Each contest permitted by this Section 5.5 shall be promptly and diligently prosecuted to a final conclusion by Tenant. 5.6 ALTERATIONS BY TENANT. Tenant shall have the right of altering, improving, replacing, modifying or expanding the facilities, equipment or appliances in the Premises from time to time as it may determine is desirable for the continuing and proper use and maintenance of the Premises under this Lease; provided, however, that any alterations, improvements, replacements, expansions or modifications in excess of Two Hundred Fifty Thousand Dollars ($250,000) (exclusive of improvements funded by Landlord under Section 5.7 below) in any rolling twelve (12) month period shall require the prior written 18 24 consent of the Landlord, which consent may not be unreasonably withheld. The cost of all such alterations, improvements, replacements, modifications, expansions or other purchases, whether undertaken as an on-going licensing, Medicare or MediCal (or any successor program) or other regulatory requirement or otherwise shall be borne solely and exclusively by Tenant (unless funded by Landlord under Section 5.7) and shall immediately become a part of the Premises and the property of the Landlord subject to the terms and conditions of this Lease. All work done in connection therewith shall be done in a good and workmanlike manner and in compliance with all existing codes and regulations pertaining to the Premises and shall comply with the requirements of insurance policies required under this Lease. In the event any items of the Premises have become inadequate, obsolete or worn out or require replacement (by direction of any regulatory body or otherwise), Tenant shall remove such items and exchange or replace the same at Tenant's sole cost and the same shall become part of the Premises and property of the Landlord except as the same is subject to Landlord's option to purchase pursuant to Section 7.5 below. Notwithstanding any of the other terms of this Section 5.6, all Landlord Personal Property which is replaced by Tenant during the Term shall, at the end of the Term, become the property of Landlord if either of the following conditions are satisfied (i) if Tenant owns such property at the end of the Term, the property shall automatically become the property of Landlord or (ii) if such property is 19 25 leased by Tenant at the end of the Term, the property shall become the property of Landlord and Landlord shall assume Tenant's obligations under such leases, but only if (a) the lessor under such leases is directly and indirectly an unrelated third party to Tenant and (b) the lease terms are customary to the business practices of health care equipment leases as such practices exist at the time of the execution of such leases and (c) within ninety days (90) prior to the end of the Term, Tenant shall deliver to Landlord a report which in reasonable detail describes the terms of such leases and identifies Landlord's Personal Property. 5.7 CAPITAL IMPROVEMENTS FUNDED BY LANDLORD. In the event Tenant desires to make a capital improvement or a related series of capital improvements to the Premises which are completed in the first Lease Year, Tenant may request that Landlord fund such improvements under this Section 5.7. Tenant shall accompany such request with a description of such improvements in reasonable detail, and Landlord shall have the right to inspect the improvements completed by Tenant. Landlord shall not unreasonably withhold its approval of the funding of such improvements. Landlord shall approve or disapprove such funding within thirty (30) days of Tenant's written request hereunder. Upon Landlord's approval of such request, Landlord shall promptly reimburse Tenant for its customary and reasonable costs of completing such capital improvements, provided that Landlord's reimbursement payments under this Section 5.7 shall 20 26 not exceed a total aggregate amount of One Million Dollars ($1,000,000). Each and every capital improvement funded by Landlord under this Section 5.7 shall immediately become a part of the Premises and shall belong to Landlord subject to the terms and conditions of this Lease. Landlord and Tenant contemplate there will be capital improvements exceeding a total aggregate amount of One Million Dollars ($1,000,000) during the Term, and at Landlord's sole discretion and subject to Landlord's Board of Directors approval, Landlord will consider funding such improvements on terms then prevailing for like investments of Landlord. If Landlord funds any capital improvements, Landlord's Original Investment shall be increased for all purposes under this Lease by the amount of the funds provided by Landlord for capital improvements. 5.8 COMPLIANCE WITH IRS GUIDELINES. Any improvement or modification to the Premises shall satisfy the requirements set forth in Sections 4(4).02 and .03 of Revenue Procedure 75-21, 1975-1 C.B. 715, as modified by Revenue Procedure 79-48, 1979-2 C.B. 529. Landlord reserves the right to refuse to consent to any improvement or modification to the Premises if, in its judgment, such improvement or modification does not meet the foregoing requirements. 5.9 OPTION TO REACQUIRE. In consideration of the execution by Tenant of this Lease and for other good and valuable 21 27 consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord hereby grants to Tenant an option to acquire that certain portion of the Premises which is described on that certain ALTA Survey dated April 4, 1994, prepared by William L. Meagher, a copy of which is attached hereto as Exhibit "G" as "Vacant Land" and as "Oak Trees", but not including a ten foot (10') strip of land along the North edge of the asphalt located on the "Oak Trees" portion of the Premises of such Survey, upon the satisfaction of all of the following terms and conditions: 5.9.1 There shall be no Event of Default hereunder on the date on which Tenant exercises such option and on the date on which such conveyance is to close; 5.9.2 Landlord shall have received satisfactory evidence that the portion of the Premises not to be released will have the benefit of such easements and rights of way in, over and through the portion of the Premises to be released as are, in Landlord's judgment, necessary or desirable to provide or assure access to and from, utility service to, parking for and common wall maintenance and support to the remaining portion of the Premises; 5.9.3 Landlord shall have received satisfactory evidence that the remaining portion after such conveyance comprises a legal lot in compliance with all subdivision and zoning laws and for tax assessment purposes; 22 28 5.9.4 Landlord shall deliver title to the portion of the Premises to be released subject to those title exceptions shown in Exhibit "E"; 5.9.5 Tenant shall pay all costs associated with the transfer of Landlord's interest in the portion of the Premises to be released, including, without limitation, Landlord's attorneys' fees. 5.9.6 The transfer documents for the portion of the Premises to be released shall contain a use restriction satisfactory to Landlord that so long as Landlord is the fee owner of any portion of the Premises remaining subject to this Lease, the released portion of the Premises shall be used solely for health care purposes, but excluding acute care and nursing home purposes; provided, however, that if Tenant desires to swap the released portion of the Premises with that certain property adjacent to the Premises and which is described on the above mentioned ALTA survey as "Existing Church (the "CHURCH PROPERTY"), then the released portion of the Premises may be used as a church; 5.9.7 The released portion shall be encumbered with a covenant running with the land in favor of such portion of the Premises remaining subject to this Lease that so long as Landlord is the fee owner of any portion of the Premises remaining subject to this Lease, the released portion of the Premises shall be used only for health care 23 29 purposes, but excluding acute care and nursing home purposes; provided, however, that if the Church Property is swapped as described in Section 5.9.6, then the released portion of the Premises shall be burdened with a covenant running with the land in favor of the portion of the Premises remaining subject to this Lease that such released portion shall be used only for church purposes so long as Landlord is the fee owner of any portion of the Premises remaining subject to this Lease, and the Church Property shall be burdened with a covenant running with the land in favor of the portion of the Premises remaining subject to this Lease that the Church Property shall be used only for health care purposes, but excluding acute care and nursing home purposes, so long as Landlord is the fee owner of any portion of the Premises remaining subject to this Lease. 5.9.8 If a portion of the Premises is released pursuant to this Section 5.9, the Premises thereafter will consist of the portion of the Premises remaining subject to this Lease, but there will be no pro-rata reductions under this Lease for any purpose, including, without limitation, Landlord's Original Investment or determining rent for renewal terms. 6. CONDITION AND TITLE OF PREMISES. Tenant acknowledges that it is presently engaged in the operation of hospital facilities in the State of California and has expertise in the hospital industry for facilities similar to the Premises. Tenant 24 30 has thoroughly investigated the Premises, has selected the Premises to its own specifications, and has concluded that no improvements or modifications to the Premises are required in order to complete the Premises for its intended use. Tenant accepts said Premises for use as a hospital under this Lease on an "AS IS" basis and will assume all responsibility and cost for the correction of any observed or unobserved deficiencies or violations. In making its decision to enter into this Lease, Tenant has not relied on any representations or warranties, express or implied, of any kind from Landlord. Tenant has examined the condition of title to the Premises prior to the execution and delivery of this Lease and has found the same to be satisfactory. 7. LANDLORD AND TENANT PERSONAL PROPERTY. 7.1 TENANT PERSONAL PROPERTY. Tenant shall install, affix or assemble or place on the Premises all items of furniture, fixtures, equipment and supplies not included as Landlord Personal Property as Tenant reasonably considers to be appropriate for Tenant's use of the Premises as contemplated by this Lease (the "TENANT PERSONAL PROPERTY"). Tenant shall provide and maintain during the entire Term all Tenant Personal Property as shall be necessary in order to operate the Premises in compliance with all requirements set forth in this Lease. All Tenant Personal Property shall be and shall remain the property of Tenant and may be removed by Tenant upon the expiration of the Term. However if there is any Event of Default, Tenant will not 25 31 remove the Tenant Personal Property from the Premises and will on demand from Landlord, convey the Tenant Personal Property to Landlord by executing a bill of sale in a form reasonably required by Landlord. In any event, Tenant will repair all damage to the Premises caused by any removal of the Tenant Personal Property. 7.2 LANDLORD'S SECURITY INTEREST. 7.2.1 The parties intend that if Tenant defaults under this Lease, Landlord will control the Tenant Personal Property and the Intangible Property so that Landlord or its designee can operate or re-let the Premises intact for use as a hospital. 7.2.2 Therefore, to implement the intention of the parties, and for the purpose of securing the payment and performance of Tenant's obligations under this Lease, Tenant, as debtor, hereby grants to Landlord, as secured party, a security interest in and an express contractual lien upon, all of Tenant's right, title and interest in and to the Tenant Personal Property and in and to the Intangible Property and any and all products and proceeds thereof, in which Tenant now owns or hereafter acquires an interest or right, including any leased Tenant Personal Property. This Lease constitutes a security agreement covering all such Tenant Personal Property and the Intangible Property. The security interest granted to Landlord in 26 32 this Section 7.2.2. is intended by Landlord and Tenant to be subordinate to any security interest granted in connection with the financing or leasing of all or any portion of the Tenant Personal Property so long as the lessor or financier of such Tenant Personal Property agrees to give Landlord written notice of any default by Tenant under the terms of such lease or financing arrangement, to give Landlord a reasonable time following such notice to cure any such default and to consent to Landlord's written assumption of such lease or financing arrangement upon Landlord's curing of any defaults thereunder. This security agreement and the security interest created herein shall survive the termination of this Lease if such termination results from the occurrence of an Event of Default. 7.3 FINANCING STATEMENTS. If required by Landlord at any time during the Term, Tenant will execute and deliver to Landlord, in form reasonably satisfactory to Landlord, additional security agreements, financing statements, fixture filings and such other documents as Landlord may reasonably require to perfect or continue the perfection of Landlord's security interest in the Tenant Personal Property and the Intangible Property and any and all products and proceeds thereof now owned or hereafter acquired by Tenant. Tenant shall pay all fees and costs that Landlord may incur in filing such documents in public offices and in obtaining such record searches as Landlord may 27 33 reasonably require. In the event Tenant fails to execute any financing statements or other documents for the perfection or continuation of Landlord's security interest, Tenant hereby appoints Landlord as its true and lawful attorney-in-fact to execute any such documents on its behalf, which power of attorney shall be irrevocable and is deemed to be coupled with an interest. 7.4 INTANGIBLE PROPERTY. The term "INTANGIBLE PROPERTY" means all rents, profits, income or revenue derived from the use of rooms or other space within the Premises or the providing of services in or from the Premises; documents, chattel paper, instruments, contract rights, deposit accounts, general intangibles, choses in action, now owned or hereafter acquired by Tenant (including any right to any refund of any taxes or other charges heretofore or hereafter paid to any governmental authority) arising from or in connection with Tenant's operation or use of the Premises; all licenses and permits now owned or hereinafter acquired by Tenant, necessary or desirable for Tenant's use of the Premises under this Lease, including without limitation, if applicable, any certificate of need or other similar certificate; the right to use any trade or other name associated with the operation of the Premises by Tenant, including without limitation the name "Ojai Valley Community Hospital"; but shall not include any accounts receivable now owned or hereafter acquired by Tenant. 28 34 7.5 OPTION TO PURCHASE. At the end of the Term Landlord has the option to purchase all Tenant Personal Property and to assume all leases for Tenant Personal Property. 8. REPRESENTATIONS AND WARRANTIES. Landlord and Tenant do hereby each for itself represent and warrant to each other as follows: 8.1 DUE AUTHORIZATION AND EXECUTION. This Lease and all agreements, instruments and documents executed or to be executed in connection herewith by either Landlord or Tenant were duly authorized and shall be binding upon the party that executed and delivered the same. 8.2 DUE ORGANIZATION. Landlord and Tenant are duly organized, validly existing and in good standing under the laws of the State of their respective formations and are duly authorized and qualified to do all things required of them under this Lease within the State of California. 8.3 NO BREACH OF OTHER AGREEMENTS. Neither this Lease nor any agreement, document or instrument executed or to be executed in connection herewith, violates the terms of any other agreement to which either Landlord or Tenant is a party. 9. FINANCIAL, MANAGEMENT AND REGULATORY REPORTS. 9.1 Monthly Facility Reports. Within thirty (30) days after the end of each calendar month during the Term, Tenant shall prepare and deliver monthly financial reports, in the form Tenant generates internally, to Landlord consisting of a balance 29 35 sheet, income statement, total patient days, occupancy and payor mix concerning the business conducted at the Premises. 9.2 QUARTERLY FINANCIAL STATEMENTS. Within forty-five (45) days of the end of each of the first three quarters of the fiscal years of Guarantor, Tenant shall deliver the unaudited quarterly consolidated financial statements of Guarantor to Landlord. 9.3 ANNUAL FINANCIAL STATEMENT. Within ninety (90) days of the fiscal year end of both Tenant and Guarantor, Tenant shall deliver to Landlord any internally prepared annual financial statements of Tenant and an unaudited draft of the annual consolidated financial statements of Guarantor. Within one hundred twenty (120) days of the fiscal year end of Guarantor, Tenant shall deliver to Landlord the annual consolidated financial statements of Guarantor audited by a reputable certified public accounting firm. Notwithstanding any of the other terms of this Section 9.3, if Tenant or Guarantor become subject to any reporting requirements of the Securities and Exchange Commission (the "SEC") during the Term, Tenant shall concurrently deliver to Landlord such reports as are delivered to the SEC pursuant to applicable security laws. 9.4 ACCOUNTING PRINCIPLES. All of the reports and statements required hereby shall be prepared in accordance with GAAP and Tenant's accounting principles consistently applied. 9.5 REGULATORY REPORTS. In addition, Tenant shall promptly, but in any event no later than ten (10) calendar days 30 36 of receipt thereof deliver to Landlord all federal, state and local licensing and reimbursement certification surveys, inspection and other reports received by Tenant as to the Premises and the operation of business thereon, including, without limitation, state department of health licensing surveys, Medicare and MediCal (and successor programs) certification surveys and life safety code reports. Within five (5) calendar days of receipt thereof, Tenant shall give Landlord written notice of any violation of any federal, state or local licensing or reimbursement certification statute or regulation including without limitation Medicare or MediCal (or successor programs), any suspension, termination or restriction placed upon Tenant or the Premises, the operation of business thereon or the ability to admit patients, or any violation of any other permit, approval or certification in connection with the Premises or its business, by any federal, state or local authority including without limitation Medicare or MediCal (or successor programs). 10. EVENTS OF DEFAULT AND LANDLORD'S REMEDIES. 10.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an event of default on the part of Tenant hereunder ("EVENT OF DEFAULT"): 10.1.1 The failure to pay within the applicable grace period any Minimum Rent, Additional Rent, taxes or assessments, utilities, premiums for insurance or other charges or payments required of Tenant under this Lease. As used herein, the "applicable grace period" shall be ten (10) 31 37 calendar days from the date on which the applicable payment is due, provided, however, following two (2) consecutive failures to pay as described in this Section 10.1.1, or following any three (3) such failures to pay in any rolling twelve (12) month period, the applicable grace period shall be five (5) calendar days from the date on which the applicable payment is due; 10.1.2 A material breach by Tenant of any of the representations, warranties or covenants in favor of Landlord as set forth in the Purchase and Sale Agreement of even date herewith; 10.1.3 A material default by Tenant or any Guarantor (or any Affiliate of either) ("AFFILIATE" being defined to mean, with respect to any person or entity, any other person or entity which controls, is controlled by or is under common control with the first person or entity) under any obligation other than this Lease owed by Tenant or any Guarantor (or any Affiliate of either) to Landlord or any Affiliate of Landlord (including without limitation any financing agreement or any other lease), which default is not cured within any applicable cure period provided in the documentation for such obligation; 10.1.4 A default by Tenant or any Guarantor with respect to any obligation with a principal amount of at least One Million Dollars ($1,000,000) under any other lease or financing agreement with any other party, which default 32 38 is not cured within any applicable cure period provided in the documentation for such obligation; 10.1.5 Any material misstatement or omission of fact in any written report, notice or communication from Tenant or any Guarantor to Landlord with respect to Tenant, any Guarantor or the Premises; 10.1.6 An assignment by Tenant or any Guarantor of all or substantially all of its property for the benefit of creditors; 10.1.7 The appointment of a receiver, trustee, or liquidator for Tenant or any Guarantor, or any of the property of Tenant or any Guarantor, if within three (3) business days of such appointment Tenant does not inform Landlord in writing that Tenant or Guarantor intends to cause such appointment to be discharged or Tenant or Guarantor does not thereafter diligently prosecute such discharge to completion within thirty (30) days after the date of such appointment; 10.1.8 The filing by Tenant or any Guarantor of a voluntary petition under any federal bankruptcy law or under the law of any state to be adjudicated as bankrupt or for any arrangement or other debtor's relief, or in the alternative, if any such petition is involuntarily filed against Tenant or any Guarantor by any other party and Tenant does not within three (3) business days of any such filing inform Landlord in writing of the intent by Tenant or 33 39 Guarantor to cause such petition to be dismissed, if Tenant or Guarantor does not thereafter diligently prosecute such dismissal, or if such filing is not dismissed within ninety (90) days after filing thereof; and 10.1.9 The failure to perform or comply with any other material Lease term or provision not requiring the payment of money, including, without limitation, the failure to comply with the provisions hereof pertaining to the use, operation and maintenance of the Premises; provided, however, the default described in this Section 10.1.9 is curable and shall be deemed cured, if: (i) within three (3) business days of Tenant's receipt of a notice of default from Landlord, Tenant gives Landlord notice of its intent to cure such default; and (ii) Tenant cures such default within thirty (30) days after such notice from Landlord, unless such default cannot with due diligence be cured within a period of thirty (30) days because of the nature of the default or delays beyond the control of Tenant, and cure after such thirty (30) day period will not have a material and adverse effect upon the Premises, in which case such default shall not constitute an Event of Default if Tenant uses its best efforts to cure such default by promptly commencing and diligently pursuing such cure to the completion thereof, provided, however, no such default shall continue for more than one hundred twenty (120) days from Tenant's receipt of a notice of default from Landlord. 34 40 10.2 REMEDIES. Upon the occurrence of an Event of Default, Landlord may exercise all rights and remedies under this Lease and the laws of the State of California available to a lessor of real and personal property in the event of a default by its lessee (including Section 1951.2 of the California Civil Code), and as to the Tenant Personal Property all remedies granted under the laws of such State to a secured party under its Uniform Commercial Code. Without limiting the foregoing, Landlord shall have the right to do any of the following: 10.2.1 Sue for the specific performance of any covenant of Tenant under this Lease as to which Tenant is in breach; 10.2.2 Upon compliance with the requirements of applicable law, Landlord may do any of the following: enter upon the Premises, terminate this Lease, dispossess Tenant from the Premises and/or collect money damages by reason of Tenant's breach, including without limitation all rent which would have accrued after such termination and all obligations and liabilities of Tenant under this Lease which survive the termination of the Term; 10.2.3 Elect to leave this Lease in place and sue for rent and/or other money damages as the same come due; 10.2.4 Before or after repossession of the Premises pursuant to Section 10.2.2, and whether or not this Lease has been terminated, Landlord shall have the right (but shall be under no obligation) to relet any portion of 35 41 the Premises to such tenant or tenants, for such term or terms (which may be greater or less than the remaining balance of the Term), for such rent, or such conditions (which may include concessions or free rent) and for such uses, as Landlord, in its absolute discretion, may determine, and Landlord may collect and receive any rents payable by reason of such reletting. Landlord shall have no duty to mitigate damages unless required by applicable law and shall not be responsible or liable for any failure to relet any of the Premises or for any failure to collect any rent due upon any such reletting. Tenant agrees to pay Landlord, immediately upon demand, all expenses incurred by Landlord in obtaining possession and in reletting any of the Premises, including fees, commissions and costs of attorneys, architects, agents and brokers; 10.2.5 Without limiting the generality of the foregoing, it is specifically intended that Landlord shall be entitled as part of its award to the measure of damages set forth in Section 1951.2(a) (3) of the California Civil Code, and in that regard the damages which Landlord may recover shall include the worth at the time of the award of the amount of unpaid rent for the balance of the then current Term after the time of award exceeds the amount of such rental loss for the same period that Tenant proves could be reasonably avoided; 36 42 10.2.6 Sell the Tenant Personal Property in a non-judicial foreclosure sale. 10.2.7 For the purpose of calculating Landlord's damages in the event of Tenant's breach, Additional Rent shall be utilized at the higher of the amount actually due or projected on the basis of historical performance, but in no event shall such amount exceed the limitations on rent increases set forth in Section 2.6 above. 10.3 RECEIVERSHIP. Tenant acknowledges that one of the rights and remedies which may be available to Landlord under applicable law is to apply to a court of competent jurisdiction for the appointment of a receiver to collect the rents, issues, profits and income of the Premises and to manage the operation of the Premises. Tenant further acknowledges that the revocation, suspension or material limitation of the certification of the Premises for provider status under Medicare or MediCal (or successor programs) and/or the revocation, suspension or material limitation of the license of the Premises as a 116 bed hospital under the laws of the State of California will materially and irreparably impair the value of Landlord's investment in the Premises. Therefore, in any of such events, and in addition to any other right or remedy of Landlord under this Lease, Landlord may petition any appropriate court for the appointment of a receiver to manage the operation of the Premises, to collect and disburse all rents, issues, profits and income generated thereby and to preserve or replace to the extent possible the nursing 37 43 home license and provider certification of the Premises or to otherwise substitute the licensee or provider thereof. Tenant hereby irrevocably stipulates to the appointment of a receiver under such circumstances and for such purposes and agrees not to contest such appointment. 10.4 LATE CHARGES. Tenant acknowledges that the late payment of any Minimum Rent or Additional Rent will cause Landlord to lose the use of such money and incur costs and expenses not contemplated under this Lease, including, without limitation, administrative and collection costs and processing and accounting expenses, the exact amount of which is extremely difficult to ascertain. Therefore, if any installment of Minimum Rent or Additional Rent is not paid within five (5) calendar days after the due date for such rent payment, then Tenant shall thereafter pay to Landlord on demand a late charge equal to ten percent (10%) of the amount of any installment of Minimum Rent or Additional Rent not paid on the due date. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the loss suffered from such nonpayment by Tenant. 10.5 REMEDIES CUMULATIVE; NO WAIVER. No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. No failure of Landlord to insist at any time 38 44 upon the strict performance of any provision of this Lease or to exercise any option, right, power or remedy contained in this Lease shall be construed as a waiver, modification or relinquishment thereof as to any similar or different breach (future or otherwise) by Tenant. A receipt by Landlord of any rent or other sum due hereunder (including any late charge) with knowledge of the breach of any provision contained in this Lease shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in a writing signed by Landlord. 10.6 PERFORMANCE OF TENANT'S OBLIGATIONS BY LANDLORD. If Tenant at any time shall fail to make any payment or perform any act on its part required to be made or performed under this Lease, then Landlord may, without waiving or releasing Tenant from any obligations or default of Tenant hereunder, make any such payment or perform any such act for the account and at the expense of Tenant, and may enter upon the Premises for the purpose of taking all such action thereon as may be reasonably necessary therefor. No such entry shall be deemed an eviction of Tenant. All sums so paid by Landlord and all necessary and incidental costs and expenses (including, without limitation, reasonable attorneys' fees and expenses) incurred in connection with the performance of any such act by Landlord, together with interest at the rate of the Prime Rate as reported daily by the Wall Street Journal plus 5% (or if said interest rate is violative of any applicable statute or law, then the maximum 39 45 interest rate allowable) from the date of the making of such payment or the incurring of such costs and expenses by Landlord, shall be payable by Tenant to Landlord on demand. 11. SECURITY DEPOSIT. Tenant has deposited with the Landlord the sum of Two Hundred Three Thousand Six Hundred Twenty-four Dollars ($203,624) representing a security deposit against the faithful performance of the terms and conditions contained in this Lease. Landlord shall not be deemed a trustee as to such deposit and shall have the right to commingle said security deposit with its own or other funds. Interest thereon at the then current rate of interest of a three month U.S. Treasury Bill shall be paid by Landlord to the Tenant on a quarterly basis in arrears. Tenant shall have the right to substitute a letter of credit for such deposit on terms and issued by a financial institution acceptable to Landlord. 12. DAMAGE BY FIRE OR OTHER CASUALTY. 12.1 RECONSTRUCTION USING INSURANCE. In the event of the damage or destruction of the Premises, Tenant shall forthwith notify Landlord and diligently repair or reconstruct the same as nearly as possible to its value, condition and character immediately prior to such damage or destruction. Any net insurance proceeds payable with respect to the casualty shall be used for the repair or reconstruction of the Premises pursuant to reasonable disbursement controls in favor of Landlord. If such proceeds are insufficient for such purposes, Tenant shall provide the required additional funds. In the event any such damage or 40 46 destruction occurs during the last six (6) months of the Term, to the extent of fifty percent (50%) or more of the replacement value of the Premises, Tenant may, at Tenant's option, to be evidenced by notice in writing given to Landlord within thirty (30) days after the occurrence of such damage or destruction, elect to pay to Landlord any available insurance proceeds, including, without limitation, business interruption insurance proceeds described in Section 4.7, in which event this Lease shall terminate. 12.2 SURPLUS PROCEEDS. If there remains any surplus of insurance proceeds after the completion of the repair or reconstruction of the Premises, such surplus shall belong to and be paid to Tenant. 12.3 No Rent Abatement. Except as provided in Section 12.1 with respect to the last six (6) months of the Term if Tenant exercises the option provided therein, the rent payable under this Lease shall not abate by reason of any damage or destruction of the Premises by reason of an insured or uninsured casualty. Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such damage or destruction. 13. CONDEMNATION. 13.1 COMPLETE TAKING. If during the Term all or substantially all of the Premises is taken or condemned by any competent public or quasi-public authority, then Tenant may, at Tenant's election, made within thirty (30) days of such taking by 41 47 condemnation, terminate this Lease, and current Minimum Rent and Additional Rent shall be prorated as of the date of such termination. The award payable upon such taking shall be allocated between Landlord and Tenant as so allocated by the taking authority. In the absence of such allocation by the taking authority, the award shall be allocated as agreed by Landlord and Tenant. Failing such agreement within thirty (30) days after the effective date of such taking, the award shall be allocated between Landlord and Tenant pursuant to the appraisal procedure described on Exhibit "D" attached hereto. 13.2 PARTIAL TAKING. In the event such condemnation proceeding or right of eminent domain results in a taking of less than all or substantially all of the Premises, the Minimum Rent and Additional Rental thereto shall be abated to the same extent as the diminution in the fair market value of the Premises by reason of the condemnation. Such fair market value shall be as agreed between Landlord and Tenant, but failing such agreement within thirty (30) days of the effective date of the condemnation such fair market value will be determined by appraisal pursuant to Exhibit "D" attached hereto. Landlord shall be entitled to receive and retain any and all awards for the partial taking and damage and Tenant shall not be entitled to receive or retain any such award for any reason. Landlord's Original Investment will be reduced for all purposes under this Lease by reason of any award paid to Landlord under this Section 13.2. 42 48 13.3 CAP ON AWARDS. Notwithstanding any of the other terms of Sections 13.1 and 13.2, in no event shall any awards allocated to Landlord for the complete taking or partial taking of the Premises, as described in Sections 13.1 and 13.2, exceed Landlord's Original Investment ($4,350,000) (as increased pursuant to Section 5.7, if applicable) increased by three percent (3%) per annum compounded annually. 13.4 LEASE REMAINS IN EFFECT. Except as provided above, this Lease shall not terminate and shall remain in full force and effect in the event of a taking or condemnation of the Premises, or any portion thereof and Tenant hereby waives all rights under applicable law to abate, reduce or offset rent by reason of such taking. 14. PROVISIONS ON TERMINATION OF TERM. 14.1 SURRENDER OF POSSESSION. Tenant shall, on or before the last day of the Term, or upon earlier termination of this Lease, surrender to Landlord the Premises (including all patient charts and records along with appropriate patient consents,) in good condition and repair, ordinary wear and tear excepted. 14.2 REMOVAL OF PERSONAL PROPERTY. If Tenant is not then in default hereunder Tenant shall have the right in connection with the surrender of the Premises to remove from the Premises all Tenant Personal Property (unless Landlord exercises the option pursuant to Section 7.5) but not the Landlord Personal Property (including the Landlord Personal Property replaced by 43 49 Tenant or required by the State of California or any other governmental entity to operate the Premises for the purpose set forth in Section 5.3 above). Any such removal shall be done in a workmanlike manner leaving the Premises in good and presentable condition and appearance, including repair of any damage caused by such removal. At the end of the Term, Tenant shall return the Premises to Landlord with the Landlord Personal Property (or replacements thereof) in the same condition and utility as was delivered to Tenant at the commencement of the Term, normal wear and tear excepted. 14.3 TITLE TO PERSONAL PROPERTY NOT REMOVED. Title to any of Tenant Personal Property which is not removed by Tenant upon the expiration of the Term shall, at Landlord's election, vest in Landlord; provided, however, that Landlord may remove and dispose at Tenant's expense of any or all of such Tenant Personal Property which is not so removed by Tenant without obligation or accounting to the Tenant. 14.4 MANAGEMENT OF PREMISES. Upon the expiration or earlier termination of the Term, Landlord or its designee, upon written notice to Tenant, may elect to assume the responsibilities and obligations for the management and operation of the Premises and Tenant agrees to cooperate fully with Landlord or its designee to accomplish the transfer of such management and operation without interrupting the operation of the Premises. Tenant shall not commit an act or be remiss in the undertaking of any act that would jeopardize the licensure or 44 50 certification of the facility, and Tenant shall comply with all requests for an orderly transfer of the hospital license, Medicare and Medical (or any successor program) certifications and possession at the time of any such surrender. Upon the expiration or earlier termination of the Term, Tenant shall promptly deliver copies of all of Tenant's books and records relating to the Premises and its operations to Landlord. 14.5 CORRECTION OF DEFICIENCIES. Upon termination or cancellation of this Lease, Tenant shall indemnify Landlord for any loss, damage, cost or expense incurred by Landlord to correct all deficiencies of a physical nature identified by the California Department of Health Services in the course of the change of ownership inspection and audit. 15. NOTICES AND DEMANDS. All notices and demands, certificates, requests, consents, approvals, and other similar instruments under this Lease shall be in writing and shall be deemed to have been properly given upon actual receipt thereof or within two (2) business days of being placed in the United States certified or registered mail, return receipt requested, postage prepaid (a) if to Tenant, addressed to Brim, Inc., 305 N.E. 102nd Avenue, Portland, Oregon 97220-4199 Attn: John Miller or at such other address as Tenant from time to time may have designated by written notice to Landlord, (b) if to Landlord, addressed to Nationwide Health Properties, Inc., 4675 MacArthur Court, Suite 1170, Newport Beach, California 92660 with a copy to O'Melveny & Myers, 610 Newport Center Drive, Suite 1700, 45 51 Newport Beach, California 92660 Attn: Real Estate Department Chairman, or at such address as Landlord may from time to time have designated by written notice to Tenant. Refusal to accept delivery shall be deemed delivery. If Tenant is not an individual, notice may be made to any officer, general partner or principal thereof. Notice to any one co-Tenant shall be deemed notice to all co-Tenants. 16. RIGHT OF ENTRY; EXAMINATION OF RECORDS. Landlord and its representative may enter the Premises at any reasonable time after notice to Tenant for the purpose of inspecting the Premises for any reason including, without limitation, Tenant's default under this Lease, or to exhibit the Premises for sale, lease or mortgage financing, or posting notices of default, or non-responsibility under any mechanic's or materialman's lien law or to otherwise inspect the Premises for compliance with the terms of this Lease. Any such entry shall not unreasonably interfere with patients, patient care, or any other of Tenant's operations. During normal business hours, Tenant will permit Landlord and Landlord's representatives, inspectors and consultants to examine all contracts, books and records relating to Tenant's operations at the Premises, whether kept at the Premises or at some other location, including, without limitation, Tenant's financial records. 17. LANDLORD MAY GRANT LIENS. Without the consent of Tenant, Landlord may, subject to the terms and conditions set forth below in this Section 17, from time to time, directly or 46 52 indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement ("ENCUMBRANCE") upon the Premises, or any portion thereof or interest therein (including this Lease), whether to secure any borrowing or other means of financing or refinancing or otherwise. Any such Encumbrance shall provide that it is subject to the rights of Tenant under this Lease, and shall further provide that so long as no Event of Default shall have occurred this Lease and Tenant's occupancy hereunder, including without limitation Tenant's right of quiet enjoyment provided in Section 18 and Tenant's right to purchase the Premises pursuant to the Addendum attached hereto, shall not be disturbed in the event any such lienholder or any other person takes possession of the Premises through foreclosure proceeding or otherwise. Upon the request of Landlord, Tenant shall subordinate this Lease to the lien of a new Encumbrance on the Premises, on the condition that the proposed lender agrees not to disturb Tenant's rights under this Lease so long as Tenant is not in default hereunder. 18. QUIET ENJOYMENT. So long as there is no Event of Default by Tenant, Landlord covenants and agrees that Tenant shall peaceably and quietly have, hold and enjoy the Premises for the Term, free of any claim or other action not caused or created by Tenant (excepting, however, intrusion of Tenant's quiet enjoyment occasioned by condemnation or destruction of the property as referred to in Section 12 and 13 hereof). 47 53 19. APPLICABLE LAW. This Lease shall be governed by and construed in accordance with the internal laws of the State of California without regard to the conflict of laws rules of such State. 20. PRESERVATION OF GROSS REVENUES. 20.1 Tenant acknowledges that a fair return to Landlord on its investment in the Premises is dependent, in part, on the concentration on the Premises during the Term of the hospital business of Tenant and its Affiliates in the geographical area of the Premises. Tenant further acknowledges that the diversion of patient care activities from the Premises to other facilities owned or operated by Tenant or its Affiliates at or near the end of the Term will have a material adverse impact on the value and utility of the Premises. 20.1.1 Therefore, Tenant agrees that during the Term, and for a period of one (1) year thereafter, neither Tenant nor any of its Affiliates shall, without the prior written consent of Landlord, operate, own, participate in or otherwise receive revenues from any other licensed acute care hospital or skilled or intermediate nursing home providing services or similar goods to those provided on or in connection with the Premises and the permitted use thereof as contemplated under this Lease, within a ten (10) mile radius of the Premises. 48 54 20.1.2 In addition, Tenant hereby covenants and agrees that for a period of one year following the expiration or earlier termination of this Lease, neither Tenant or its Affiliates shall, without prior written consent of Landlord, hire, engage or otherwise employ any management or supervisory personnel working on or in connection with the Premises, unless such personnel approach Tenant directly and request continued employment by Tenant. 20.2 Except as required by law or for medically appropriate reasons, prior to and after Lease termination, Tenant will not recommend or solicit the removal or transfer of any patient from the Premises to any other nursing or health care facility. 20.3 The provisions of this Section 20 shall not apply to the Acacias Care Center located at 601 North Montgomery, Ojai, California or to any of the following facilities which Tenants builds: assisted living facility, independent living facility or dedicated Alzheimer's facility. 21. HAZARDOUS MATERIALS. 21.1 HAZARDOUS MATERIAL COVENANTS. Tenant's use of the Premises shall comply with all Hazardous Materials Laws. In the event any Environmental Activities occur or are suspected to have occurred in violation of any Hazardous Materials Laws or if Tenant has received any Hazardous Materials Claim against the Premises, Tenant shall promptly obtain all permits and approvals 49 55 necessary to remedy any such actual or suspected problem through the removal of Hazardous Materials or otherwise, and upon Landlord's approval of the remediation plan, remedy any such problem to the satisfaction of Landlord, in accordance with all Hazardous Materials Laws and good business practices. 21.2 TENANT NOTICES TO LANDLORD. Tenant shall immediately advise Landlord in writing of: 21.2.1 any Environmental Activities in violation of any Hazardous Materials Laws, 21.2.2 any Hazardous Materials Claims against Tenant or the Premises, 21.2.3 any remedial action taken by Tenant in response to any Hazardous Materials Claims or any Hazardous Materials on, under or about the Premises in violation of any Hazardous Materials Laws, 21.2.4 Tenant's discovery of any occurrence or condition on or in the vicinity of the Premises that materially increase the risk that the Premises will be exposed to Hazardous Materials, 21.2.5 all communications after the date hereof to or from Tenant, any governmental authority or any other person relating to Hazardous Materials Laws or Hazardous Materials Claims with respect to the Premises, including copies thereof. 21.3 EXTENSION OF TERM. Notwithstanding any other provision of this Lease, in the event any Hazardous Materials are 50 56 discovered on, under or about the Premises in violation of any Hazardous Materials Law, the Term shall be automatically extended and this Lease shall remain in full force and effect until the earlier to occur of the completion of all remedial action or monitoring, as approved by Landlord, in accordance with all Hazardous Materials Laws, or the date specified in a written notice from Landlord to Tenant terminating this Lease (which date may be subsequent to the date upon which the Term was to have expired). 21.4 PARTICIPATION IN HAZARDOUS MATERIALS CLAIMS. Landlord shall have the right, at Tenant's sole cost and expense and with counsel chosen by Landlord, to join and participate in, as a party if it so elects, any legal proceedings or actions initiated in connection with any Hazardous Materials Claims. 21.5 ENVIRONMENTAL ACTIVITIES shall mean the use, generation, transportation, handling, discharge, production, treatment, storage, release or disposal of any Hazardous Materials at any time to or from the Premises or located on or present on or under the Premises. 21.6 HAZARDOUS MATERIALS shall mean (i) any petroleum products and/or by-products (including any fraction thereof), flammable substances, explosives, radioactive materials, hazardous or toxic wastes, substances or materials known carcinogens or any other materials, contaminants or pollutants which pose a hazard to the Premises or to persons on or about the Premises or cause the Premises to be in violation of any 51 57 Hazardous Materials Laws; (ii) asbestos in any form which is friable; (iii) urea formaldehyde in foam insulation or any other form; (iv) transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty (50) parts per million or any other more restrictive standard then prevailing; (v) medical wastes and biohazards; (vi) radon gas; and (vii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or may or could pose a hazard to the health and safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises. 21.7 HAZARDOUS MATERIALS CLAIMS shall mean any and all enforcement, clean-up, removal or other governmental or regulatory actions or orders threatened, instituted or completed pursuant to any Hazardous Material Laws, together with all claims made or threatened by any third party against the Premises, Landlord or Tenant relating to damage, contribution, cost recovery compensation, loss or injury resulting from any Hazardous Materials. 21.8 HAZARDOUS MATERIALS LAWS shall mean any laws, ordinances, regulations, rules, orders, guidelines or policies relating to the environment, health and safety, Environmental Activities, Hazardous Materials, air and water quality, waste disposal and other environmental matters. 52 58 21.9 REMEDIATION OF EXISTING ENVIRONMENTAL CONDITION. Tenant covenants and agrees to take all action required to complete or cause to be completed the remediation of the environmental condition of the Premises and property adjacent to the Premises as described in that certain Report of Site Assessment dated June 16, 1993 prepared by Construction Testing & Engineering, Inc., as such assessment has been supplemented by further investigation and remediation activities. All remedial work shall be performed as required by the Environmental Health Division of the County of Ventura Resource Management Agency and such other local, State or Federal agencies that have or may obtain jurisdiction with respect to the Premises, and Tenant shall diligently perform such remediation until it obtains a written notice from the County, or other agencies, if applicable, indicating that the remediation is closed and that no further action need be taken with respect to the environmental condition. Tenant shall deliver to Landlord copies of all test results, reports and communications obtained or prepared with respect to such activities. 22. ASSIGNMENT AND SUBLETTING. Tenant shall not, without the prior written consent of Landlord, which may be withheld at Landlord's sole discretion, voluntarily or involuntarily assign or hypothecate this Lease or any interest herein or sublet greater than ten percent (10%) of the gross building area of the Premises or any part thereof. For the purposes of this Lease, a management or similar agreement shall be considered to be an 53 59 assignment of this Lease by Tenant (except if such agreement is with an Affiliate of Tenant). Any of the foregoing acts without such consent shall be void but shall, at the option of Landlord in its sole discretion, constitute an Event of Default giving rise to Landlord's right, among other things, to terminate this Lease. Without limiting the foregoing, this Lease shall not, nor shall any interest of Tenant herein, be assigned or encumbered by operation of law without the prior written consent of Landlord which may be withheld at Landlord's sole discretion. Notwithstanding the foregoing, Tenant may without Landlord's consent assign this Lease or sublet the Premises or any portion thereof to a wholly-owned subsidiary of Tenant or Guarantor, provided that such subsidiary fully assumes the obligations of Tenant under this Lease, Tenant remains fully liable under this Lease, any Guarantor remains fully liable with respect to its guaranty of this Lease, the use of the Premises remains unchanged, and no such assignment or sublease shall be valid and no such subsidiary shall take possession of the Premises until an executed counterpart of such assignment or sublease has been delivered to Landlord. Anything contained in this Lease to the contrary notwithstanding, Tenant shall not sublet the Premises on any basis such that the rental to be paid by the sublessee thereunder would be based, in whole or in part, on either the income or profits derived by the business activities of the sublessee, or any other formula, such that any portion of the sublease rental received by Landlord would fail to qualify as "rents from real 54 60 property" within the meaning of Section 856(d) of the U.S. Internal Revenue Code, or any similar or successor provision thereto. 22.1 For the purposes of this Lease, the sale, assignment, transfer or other disposition of the stock of Tenant and/or any Guarantor, which results in a change in the person, persons, entity or entities which ultimately exert effective control over the management of the affairs of Tenant and/or Guarantor as of the date hereof, shall be deemed to be an assignment of the Lease. 22.2 Notwithstanding anything to the contrary contained in Section 22.1, in no event shall an initial public offering of Guarantor be deemed to be an assignment of the Lease; provided, however, that after such initial public offering of Guarantor and without limiting Section 22.1, any sale, assignment, transfer or other disposition of the voting stock of Guarantor which results in twenty-five percent (25%) or more of the voting stock of Guarantor being held by any person or entity or related group of persons or entities who did not have such ownership after the initial public offering shall be deemed to be an assignment of the Lease. 22.3 In the event that this Lease is deemed to be assigned pursuant to Section 22.1 or Section 22.2, Landlord shall, at Landlord's sole discretion (i) consent to the assignment or (ii) put the Premises to Tenant. If Landlord puts the Premises to Tenant, Tenant shall purchase the Premises from 55 61 Landlord for a cash price equal to the greater of Landlord's Original Investment ($4,350,000) (as increased under Section 5.7, if applicable), or the fair market value of the Premises on the date of Landlord's notice of exercise of its option hereunder. Such fair market value and purchase shall be determined and conducted as set forth in Section 5.4 23. INDEMNIFICATION. To the fullest extent permitted by law, Tenant agrees to protect, indemnify, defend and save harmless Landlord, its directors, officers, shareholders, agents and employees from and against any and all foreseeable or unforeseeable liability, expense loss, costs, deficiency, fine, penalty, or damage (including without limitation punitive or consequential damages) of any kind or nature, including reasonable attorneys' fees, from any suits, claims or demands, on account of any matter or thing, action or failure to act arising out of or in connection with (a) this Lease (including, without limitation, the breach by Tenant of any of its obligations hereunder), (b) the Premises, or (c) the operations of Tenant on the Premises, including without limitation all Environmental Activities on the Premises, all Hazardous Materials Claims or any violation by Tenant of a Hazardous Materials Law with respect to the Premises; provided, however, such indemnity shall not extend to any such suit, claim or damage which is caused solely by the willful misconduct or gross negligence of Landlord, its directors, officers, agents and employees. Upon receiving knowledge of any suit, claim or demand asserted by a third party 56 62 that Landlord believes is covered by this indemnity, Landlord shall give Tenant notice of the matter. Tenant shall defend Landlord against such matter at Tenant's sole cost and expense with legal counsel satisfactory to Landlord. Landlord may elect to defend the matter with its own counsel at Tenant's expense. 24. HOLDING OVER. If Tenant shall for any reason remain in possession of the Premises after the expiration or earlier termination of this Lease, such possession shall be a month-to-month tenancy during which time Tenant shall pay as rental each month, 1 1/2 times the aggregate of the monthly Minimum Rent payable with respect to the last Lease Year plus Additional Rent allocable to the month, all additional charges accruing during the month and all other sums, if any, payable by Tenant pursuant to the provisions of this Lease with respect to the Premises. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Lease, nor shall anything contained herein be deemed to limit Landlord's remedies pursuant to this Lease or otherwise available to Landlord at law or in equity. 25. ESTOPPEL CERTIFICATES. Tenant shall, at any time upon not less than five (5) days prior written request by Landlord, execute, acknowledge and deliver to Landlord or its designee a statement in writing, executed by an officer or general partner of Tenant, certifying that this Lease is unmodified and in full force and effect (or, if there have been any modifications, that 57 63 this Lease is in full force and effect as modified, and setting forth such modifications), the dates to which Minimum Rent, Additional Rent and additional charges hereunder have been paid certifying that no default by either Landlord or Tenant exists hereunder or specifying each such default and as to other matters as Landlord may reasonably request. 26. CONVEYANCE BY LANDLORD. If Landlord or any successor owner of the Premises shall convey the Premises in accordance with the terms hereof, Landlord or such successor owner shall thereupon be released from all future liabilities and obligations of Landlord under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Premise and all such future liabilities and obligations shall thereupon be binding upon the new owner. 27. WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive any rights to trial by jury in any action, proceedings or counterclaim brought by either of the parties against the other in connection with any matter whatsoever arising out of or in any way connected with this Lease, including, without limitation, the relationship of Landlord and Tenant, Tenant's use and occupancy of the Premises, or any claim of injury or damage relating to the foregoing or the enforcement of any remedy hereunder. 28. ATTORNEYS' FEES. If Landlord or Tenant brings any action to interpret or enforce this Lease, or for damages for a alleged breach hereof, the prevailing party in any such action shall be entitled to reasonable attorneys' fees and costs as 58 64 awarded by the court in addition to all other recovery, damages and costs. 29. SEVERABILITY. In the event any part or provision of the Lease shall be determined to be invalid or enforceable, the remaining portion of this Lease shall nevertheless continue in full force and effect. 30. COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same agreement. 31. BINDING EFFECT. Subject to the provisions of Section 22 above, this Lease shall be binding upon and inure to the benefit of Landlord and Tenant and their respective heirs, personal representatives, successors in interest and assigns. 32. WAIVER AND SUBROGATION. Landlord and Tenant hereby waive to each other all rights of subrogation which any insurance carrier, or either of them, may have as to the Landlord or Tenant by reason of any provision in any policy of insurance issued to Landlord or Tenant, provided such waiver does not thereby invalidate the policy of insurance. 33. MEMORANDUM OF LEASE. Landlord and Tenant shall, promptly upon the request of either, enter into a short form memorandum of the Lease, in form suitable for recording under laws of the State of California in which reference to this Lease shall be made. The party requesting such recordation shall pay all costs and expenses of preparing and recording such memorandum of this Lease. 59 65 34. INCORPORATION OF RECITALS AND ATTACHMENTS. The recitals and exhibits, schedules, addenda and other attachments to this Lease are hereby incorporated into this Lease and made a part hereof. 35. TITLES AND HEADINGS. The titles and headings of sections of this Lease are intended for convenience only and shall not in any way affect the meaning or construction of any provision of this Lease. 36. USURY SAVINGS CLAUSE. Nothing contained in this Lease shall be deemed or construed to constitute an extension of credit by Landlord to Tenant. Notwithstanding the foregoing, in the event any payment made to Landlord hereunder is deemed to violate any applicable laws regarding usury, the portion of any payment deemed to be usurious shall be held by Landlord to pay the future obligations of Tenant as such obligations arise and, in the event Tenant discharges and performs all obligations hereunder, such funds will be reimbursed to Tenant upon the expiration of the Term. No interest shall be paid on any such funds held by Landlord. 37. JOINT AND SEVERAL. If more than one person is the Tenant hereunder, the liability of such persons under this Lease shall be joint and several. 38. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All of the obligations, representations, warranties and covenant of Tenant under this Lease shall survive the expiration or earlier termination of the Term. 60 66 39. INTERPRETATION. Both Landlord and Tenant have been represented by counsel and this Lease has been freely and fairly negotiated. Consequently, all provisions of this Lease shall be interpreted according to their fair meaning and shall not be strictly construed against any party. Executed as of the date indicated above. TENANT: BRIM HOSPITALS, INC., an Oregon corporation By: /s/ John R. Miller --------------------------------- Its: President LANDLORD: NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation By: /s/ --------------------------------- Its: Vice President 61 67 EXHIBIT "A" Legal Description PARCEL 1: A part of Tract No. 8 of the Bard Subdivision of the Rancho Ojai, in the City of Ojai, County of Ventura, State of California, as per map thereof recorded in Book 5, Page 25 1/2 of Maps, in the office of the County Recorder of said County, described as follows: Beginning at a 1-inch iron pipe set in the Southerly line of Meiners Road (formerly Matilija Road) at the Northeast corner of that certain parcel of land as conveyed to Hattie McDonnell Russell by deed recorded in Book 29, Page 262 of Official Records; thence from said point of beginning, 1st: South 73(degrees) 24' East 139.24 feet along the Southerly line of said Meiners Road to a ford axle set at the Northwest corner of that certain parcel of land as conveyed to Clara R. Barlow by deed recorded in Book 67, Page 181 of Official Records; thence, 2nd: South 18(degrees) 36' West 749.59 feet along the Westerly line of said lands of Clara R. Barlow and the Southwesterly prolongation of same; at 175.00 feet a ford axle set at the Southwest corner of said lands of Clara R. Barlow; at 749.59 feet a 1-inch iron pipe; thence, 3rd: North 73(degrees) 24' West 146.88 feet to a 1-inch iron pipe set the Southeast corner of said lands of Hattie McDonnell Russell, thence, 4th: North 19(degrees) 11' East 749.90 feet along the Easterly line of said lands of Hattie McDonnell Russell to the point of beginning. PARCEL 2: A portion of Tract No. 8 of the Bard Subdivision of Rancho Ojai, in the City of Ojai, County of Ventura, State of California, according to the map recorded in Book 5, Page 25 1/2 of Maps, the office of the County Recorder of said County, described as follows: Beginning at the Northeast corner of the land described in deed to Edward R. Lambert and wife, recorded July 1, 1953 in Book 1142, Page 222, Official Records; thence along the East line of said land, 1st: South 19(degrees) 11' West 751.50 feet to an angle point therein; thence, A-1 68 2nd: South 73(degrees) 24' East 219 feet, more or less to the most Westerly corner of the land conveyed to Adam Rodriguez and wife by deed recorded in Book 680, Page 483 of Official Records; thence along the West line of said land of Rodriguez, 3rd: North 19(degrees) 11' East 749.90 feet to a point on the South line of Cuyama Road (formerly Matilija Road) 40 feet wide; thence along the Southerly line of said land, 4th: North 73(degrees) 24' West 218.96 feet to the point of beginning. EXCEPT from the Northerly 1.885 acres of said land an undivided 60% of all oil, gas and other hydrocarbon substances, without the right of entry above a depth of 500 feet from the surface of said land for the development of said oils and minerals, as reserved by George S. Biggers, et ux., in deed recorded February 19, 1959 in Book 1704, Page 278, Official Records. PARCEL 3: A portion of Tract No. 8 of the Bard Subdivision of Rancho Ojai, in the City of Ojai, County of Ventura, State of California, according to the map recorded in Book 5, Page 25-1/2 of Maps, in the office of the County Recorder of said County, described as follows: Commencing at the Northeast corner of the land described in deed to Edward R. Lambert and wife, recorded July 1, 1953 in Book 1142, Page 222 of Official Records; thence along the East line of said land, South 19(degrees) 11' West 751.50 feet to an angle point therein, said point being to the true point of beginning; thence continuing along said East line, 1st: South 16(degrees) 11' West 362.25 feet to a point in the Northerly line of that certain strip of land conveyed to Ventura County by deed recorded in Book 384, Page 436 of Official Records; thence 2nd: South 74(degrees) 55' East 205.80 feet to the Southwest corner of the land described in Parcel 1 deeded to William E. Weidemann, et al., recorded September 17, 1958 in Book 1654, Page 451 of Official Records; thence along the West line of the land last referred to, 3rd: Northerly in a direct line to the Northwest corner of said land, at the most Westerly corner of the land conveyed to Adam Rodriguez and wife by deed recorded in Book 680, Page 483, Official Records; thence, 4th: North 73(degrees) 24' West 219 feet, more or less to the point of beginning. A-2 69 EXHIBIT "B" Landlord Personal Property B-1 70 Page 1 LANDLORD PERSONAL PROPERTY C FAS ASSET DATE L NUMBR DESCRIPTION LOCATN Co ACQRD A 00001 LAMINAR AIR FL 7021 06/87 A 00004 FACSIMILE MACH 8510 06/87 A 00005 REFURB AIR CON 06/87 A 00013 POWER GENERATO 8480 08/87 A 00015 MEDICATION CAR 7050 09/87 A 00016 WATER SOFTENER 8480 09/87 A 00017 OPERATING ROOM 7021 09/87 A 00018 DIETARY EQUIPM 8340 10/87 A 00019 PEDIATRIC SCAL 6170 10/87 A 00020 LAB DICTATION 7060 10/87 A 00021 CHILD BEARING 6160 11/87 A 00022 2 ROTARY VANE 8480 11/87 A 00023 MINOR SURGERY 7021 11/87 A 00024 ICEMAKER 8340 10/88 A 00029 COULTER COUNTE 7010 06/88 A 00030 WATER HEATER 6202 07/88 A 00031 HEAT EXCHANGE/ 7021 07/88 A 00032 INTERCOM SYSTE 7030 07/88 A 00033 BEAR VENTILATO 7180 08/88 A 00034 INTERCOM CONV 7030 10/88 A 00035 EMPLOYEE NAME 8650 10/88 A 00036 PHYSICAL THERA 7200 10/88 A 00037 PC & PRINTER 8610 11/88 A 00038 ULTRASOUND PRO 7165 01/89 A 00039 COAG ANALYZER 7060 01/89 A 00041 FETAL HEART MO 6160 04/89 A 00042 BOILER 8480 02/89 A 00043 TRACTION TABLE 7200 04/89 A 00044 STRETCHER BEDS 7030 05/89 A 00045 PHONE RELOCATE 8550 02/90 A 00046 HYPO/HYPERTHER 6010 12/89 A 00047 INFANT WARMER 6170 09/89 A 00048 MONITOR CABLE 6160 04/90 A 00049 BP MONITOR 7230 04/90 A 00050 WORD PROCESSIN 8610 04/90 A 00051 SNU A/C ARCHIT 6202 01/90 A 00055 SNU A/C ARCHIT 6202 09/89 A 00056 SNU A/C ARCHIT 6202 12/89 A 00062 LASER JET PRIN 8510 05/90 A 00063 ARTHROSCOPE 7021 07/90 A 00064 BRONCHOSCOPE 7021 07/90 A 00068 PORTABLE WHIRL 7200 10/90 71 Page 2 C FAS ASSET DATE L NUMBR DESCRIPTION LOCATN Co ACQRD A 00069 FOOD MAINTENAN 8340 10/90 A 00071 CABLE/TERMINAL 8540 10/90 A 00072 PT EXAM TABLE 7200 10/90 A 00073 WATER SYSTEM 8480 10/90 A 00074 WATER SYSTEM 8480 11/90 A 00075 FACSIMILE MACH 8530 11/90 A 00078 CHOLECYSTO MAC 7021 12/90 A 00083 CONV OUTLETS 6202 03/91 A 00084 SPIROMETER 7080 03/91 A 00085 U.S. STIM UNIT 7165 03/91 A 00086 REFRIGERATOR 8340 04/91 A 00087 REFRIGERATOR 8340 04/91 A 00088 VENTILATOR 7180 04/91 A 00089 AUTOCLAVE 7420 04/91 A 00091 AUTOCLAVE INST 7120 05/91 A 00092 COMPUTERS - 2 8510 05/91 A 00093 COMPUTERS - LAB 7060 05/91 A 00094 MODEMS - MED R 8700 05/91 A 00095 GI COAGULATOR 7420 06/91 A 00096 GI COAGULATOR 7420 06/91 A 00098 SNU WATER HEAT 6202 07/91 A 00104 GENERATOR FUEL 8480 09/91 A 00105 NIT OXIDE TANK 7010 09/91 A 00109 DRAPES-ACUTE R 6080 09/91 A 00115 CABINETS - PHA 7170 12/91 A 00119 CURTAINS - ER 7021 01/92 A 00123 REFRIGERATOR-B 7060 01/92 A 00124 MICRO 100 WIRE 7021 01/92 A 00125 FLOOR CARE MAC 8460 01/92 A 00126 DEFIB MONITOR 6010 01/92 A 00128 BLOOD PRESSURE 6160 01/92 A 00129 WIRE SHELVING 8420 01/92 A 00153 HEALTH PROMO C 8480 11/87 A 00154 M/S RENOV-DRS 7021 11/87 A 00155 SNF/CDU RENOV- 6202 10/87 A 00156 SNF/CDU FURNIT 6202 10/87 A 00157 DIET. FOOD STA 8340 10/87 A 00159 C-ARM SURGERY 7021 01/88 A 00160 PORTABLE X-RAY 7170 01/88 A 00161 FURNITURE-MED/ 6080 03/88 A 00163 FURNITURE-MED/ 6080 04/88 A 00164 PHONE SYSTEM 8480 04/88 72 Page 3 C FAS ASSET DATE L NUMBR DESCRIPTION LOCATN Co ACQRD A 00171 ZIMMER O/R SAW 7021 09/89 A 00173 A/C UNIT - DP 8540 02/90 A 00175 SNU A/C UNITS 6202 09/89 A 00178 O.R. CABINETS 7021 02/89 A 00276 HEAT,VENTILATI 6015 06/87 A 00279 A/C 5 TONE LEN 6080 06/87 A 00281 A/C NPHCA-024 7010 06/87 A 00283 A/C UNIT INSTA 7021 06/87 A 00285 LIGHTING-NEW L 7060 06/87 A 00286 AIR CONDITIONI 7060 06/87 A 00288 FUME HOOD, VAC 7060 06/87 A 00291 GENERATOR SET 7140 06/87 A 00292 ELEC WIRING/CT 7145 06/87 A 00293 ELEC FEED/WIRI 7145 06/87 A 00294 INSTALL CABS/C 7230 06/87 A 00296 EXHAUST FAN #7 8470 06/87 A 00297 A/C ECOMIZER, V 8470 06/87 A 00299 LIGHTS & FLORE 8470 06/87 A 00301 GAS TANK OVERF 8470 06/87 A 00302 PIPE INSULATIO 8470 06/87 A 00304 INSTALL GENERA 8480 06/87 A 00306 INSTALL HAND R 8480 06/87 A 00307 WATER HEATER 1 8480 06/87 A 00308 A/C CONDENSOR 8480 06/87 A 00309 A/C CONDENSOR 8480 06/87 A 00310 A/C CONDENSOR 8480 06/87 A 00311 BOILER STEAM F 8480 06/87 A 00312 INSTALL BOILER 8480 06/87 A 00314 FIXED EQUIP AD 8610 06/87 A 00315 BAL FWD FIXED 8610 06/87 A 00316 FIXED EQUIP AD 8610 06/87 A OO317 FIXED EQUIP AD 8610 06/87 A 00318 FIXED EQUIP AD 8610 06/87 A 00323 FIRE SUPPRESSI 8610 06/87 A 00324 AIR DUCTS THER 8610 06/87 A 00325 INSTL HANDRAIL 8610 06/87 A 00333 BED HOSP ELEC 6015 06/87 A 00335 BED HOSP ELEC 6015 06/87 A 00336 BED HOSP ELEC 6015 06/87 A 00337 BED HOSP ELEC 6015 06/87 A 00338 BED HOSP ELEC 6015 06/87 A 00339 LIFT/SCALE - 2 6015 06/87 73 Page 4 C FAS ASSET DATE L NUMBR DESCRIPTION LOCATN Co ACQRD A 00341 MEDI PREP 6015 06/87 A 00392 MISC. CABS,TAB 6081 06/87 A 00393 BED HOSP ELEC 6081 06/87 A 00403 ICE MACHINE 6081 06/87 A 00428 BED HOSP ELEC 6081 06/87 A 00429 BED HOSP ELEC 6081 06/87 A 00430 BED HOSP ELEC 6081 06/87 A 00431 BED HOSP ELEC 6081 06/87 A 00432 BED HOSP ELEC 6081 06/87 A 00433 BED HOSP ELEC 6081 06/87 A 00434 BED HOSP ELEC 6081 06/87 A 00435 BED HOSP ELEC 6081 06/87 A 00439 MEDICATION CAR 6081 06/87 A 00450 BED HOSP ELEC 6160 06/87 A 00451 BED HOSP ELEC 6160 06/87 A 00452 BED HOSP ELEC 6160 06/87 A 00453 BED HOSP ELEC 6160 06/87 A 00455 BED HOSP ELEC 6160 06/87 A 00458 VACUUM EXTRACT 6160 06/87 A 00478 INCUBATOR OHIO 6170 06/87 A 00479 INCUBATOR INFA 6170 06/87 A 00483 LIGHT, WARMING 6170 06/87 A 00534 MISC CABS, TAB 6181 06/87 A 00535 IMPRINTER-FARR 6181 06/87 A 00576 COUCH - FABRIC 6181 06/87 A OO582 MISC TABLES & 6202 06/87 A 00675 FIBERGLASS BAT 6202 06/87 A 00684 12 DINING ROOM 6202 06/87 A 00687 OB TABLE 7010 06/87 A 00691 INFANT INCUBAT 7010 06/87 A 00697 BIRTHING BED 7010 06/87 A 00707 SURG INSTR - C 7021 06/87 A 00708 TABLE OR AFFIL 7021 06/87 A 00709 LIGHT OR ORBIT 7021 06/87 A 00720 MICROSCOPE O/R 7021 06/87 A 00734 ENT BINOC VIEW 7021 06/87 A 00736 LARYNGOSCOPE 7021 06/87 A 00740 COLONFIBERSCOP 7021 06/87 A 00741 ORTHOPEDIC TAB 7021 06/87 A 00742 SURGICAL LIGHT 7021 06/87 A 00746 SAW, SAGITTAL 7021 06/87 A 00747 OPERATING TABL 7021 06/87 74 Page 5
C FAS ASSET DATE L NUMBR DESCRIPTION LOCATN Co ACQRD A 00763 STERILIZER CAS 7050 06/87 A 00764 STERILIZER 7050 06/87 A 00765 AERATOR 7050 06/87 A 00766 PRINTER 7050 06/87 A 00796 CENTRIFUGE - S 7060 06/87 A 00800 CENTRIFUGE REF 7060 06/87 A 00801 CHEMISTRY ANAL 7060 06/87 A 00803 CELL WASHER 7060 06/87 A 00829 CRYOSTAT 7070 06/87 A 00830 TISSUE PROCESS 7070 06/87 A 00831 MICROSCOPE A/O 7070 06/87 A 00836 PULMONARY FUNC 7080 06/87 A 00837 HOSP BED 3 CR 7080 06/87 A 00840 MOBILE X-RAY U 7140 06/87 A 00841 MOBILE C-ARM 7140 06/87 A 00844 X-RAY SYSTEM 7140 06/87 A 00845 X-RAY SYSTEM 7140 06/87 A 00863 MOBILE X-RAY U 7140 06/87 A 00892 VENTILATOR 7180 06/87 A 00899 BED-POSTURAL D 7180 06/87 A 00931 STRETCHER - 62 7230 06/87 A 00932 STRETCHER - M 7230 06/87 A 00933 STRETCHER - TR 7230 06/87 A 00944 POTS, PANS, DI 8340 06/87 A 00945 DINING RM TABL 8340 06/87 A 00949 FREEZER - TRAU 8340 06/87 A 00955 MEAT SLICER 8340 06/87 A 00972 UTILITY REFRIG 8340 06/87 A 00974 FOOD SERVICE T 8340 06/87 A 00975 FOOD SERVICE T 8340 06/87 A 00976 FOOD SERVICE T 8340 06/87 A 00981 15' SERVING CO 8340 06/87 A 00983 HOOD EXHAUST 8340 06/87 A 00995 DISHWASHER, ST 8340 06/87 A 00998 OVEN/RANGE - D 8340 06/87 A 01015 MISC EQUIP-CHA 8460 06/87 A 01016 MISC EQUIP-CHA 8460 06/87 A 01023 FLOOR MACH NSS 8460 06/87 A 01065 CABINET 8510 06/87 A 01120 PERFORATOR 8540 06/87 A 01191 TABLE, RITTER 8610 06/87
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C FAS ASSET DATE L NUMBER DESCRIPTION LOCATN Co ACQRD A 01205 WOOD CABINETS 8610 06/87 A 01273 MONITOR PAT H/ 6015 06/87 A 01274 MONITOR PAT H/ 6015 06/87 A 01275 MONITOR PAT H/ 6015 06/87 A 01276 MONITOR PAT H/ 6015 06/87 A 01277 NONITOR PAT H/ 6015 06/87 A 01278 RECEIVER TELEM 6015 06/87 A 01279 RECEIVER TELEM 6015 06/87 A 01283 MONITOR PAT H/ 6015 06/87 A 01284 DEFRIBILLATOR 6015 06/87 A 01288 MONITOR, DINAM 6015 06/87 A 01289 PACEMAKER, TEM 6015 06/87 A 01298 CURTAINS 6080 06/87 A 01299 MATTRESS MAXIF 6080 06/87 A 01317 DEFIBRILLATOR 6081 06/87 A 01324 CARPETING 6081 06/87 A 01326 MATTRESSES 6081 06/87 A 01334 MONITOR, INFANT 6160 06/87 A 01336 MONITOR EGG/RE 6170 06/87 A 01344 CARPET COU HAL 6181 06/87 A 01346 CHAIR SCALE 6202 06/87 A 01350 MONITOR FETAL 7010 06/87 A 01352 LECTURESCOPE L 7021 06/87 A 01353 OSTEO COMPRESS 7021 06/87 A 01369 VIDEO SYS MICR 7021 06/87 A 01370 PROJECTOR CINE 7021 06/87 A 01373 PROJECTOR 7021 06/87 A 01375 CAMERA - ARTHR 7021 06/87 A 01377 LAMINECTOMY 7021 06/87 A 01378 OSTEO COMPRESS 7021 06/87 A 01379 FIBEROPTIC EQU 7021 06/87 A 01381 MONTIOR FOR PA 7021 06/87 A 01382 DRILL MICRO 50 7021 06/87 A 01383 ARTHROSCOPIC S 7021 06/87 A 01384 OXIMETER, OXYGE 7021 06/87 A 01385 ARTHROSCOPIC R 7021 06/87 A 01387 DRILL MAXI AIR 7021 06/87 A 01388 LAPAROSCOPE 7021 06/87 A 01391 ANES UNIT-OHIO 7040 06/87 A 01393 MONITOR-BLOOD 7040 06/87 A 01394 MONITOR VITAL 7040 06/87 A 01395 NON VITAL SIGN 7040 06/87
76 Page 7 C FAS ASSET DATE L NUMBR DESCRIPTION LOCATN Co ACQRD A 01398 ANES MACHINE M 7040 06/87 A 01410 COUNTER-NUC ME 7060 06/87 A 01412 CHEMISTRY ANAL 7060 06/87 A 01414 URINOMETER 7060 06/87 A 01415 CONSOLE TISSUE 7060 06/87 A 01418 CULTURE & SENS 7060 06/87 A 01421 ANALYZER-PH/BL 7080 06/87 A 01422 BLOOD GAS ANAL 7080 06/87 A 01423 ABG INTERPRETA 7080 06/87 A 01424 EKG MACHINE 7110 06/87 A 01429 IMAGE INTENSIF 7140 06/87 A 01430 CHEST GRID PIC 7140 06/87 A 01433 PROCESSOR X-RA 7140 06/87 A 01435 ILLUMINATOR X- 7140 06/87 A 01438 CONSOLE-ULTRAS 7140 06/87 A 01440 LINEAR RAY MOO 7146 06/87 A 01441 ULTRASOUND UNI 7146 06/87 A 01442 CAMERA - DUNN 7146 06/87 A 01443 COMPAQ COMPUTE 7170 06/87 A 01445 WHEELWRITER 5' 7170 06/87 A 01451 SENSOR CABLE T 7180 06/87 A 01457 DEFIBRILLATOR 7230 06/87 A 01460 BLOOD PRESSURE 7230 06/87 A 01461 RADIO ANTENNA 7230 06/87 A 01470 CARPETING 8460 06/87 A 01471 DRAPE/CUBE/CUR 8460 06/87 A 01479 CARPET 75 SQ Y 8470 06/87 A 01481 PLUMBERS SNAKE 8470 06/87 A 01491 CARPETING-2ND 8480 06/87 A 01494 PAPER SHREDDER 8510 06/87 A 01495 PHOTOCOPIER 8560 06/87 A 01497 PERSONAL COMPU 8510 06/87 A 01508 MICROFICHE REA 8540 06/87 A 01511 PHOTOCOPIER 8560 06/87 A 01512 EQUIP ADDTION 8610 06/87 A 01518 TYPEWRITER-QUI 8610 06/87 A 01519 WHEELWRITER - 8610 06/87 A 01522 COPIER MSC 8610 06/87 A 01524 STIMULATION EQ 8610 06/87 A 01536 WHEELWRITER 40 8700 06/87 A 01540 RHTTHM SIMULAT 8740 06/87 77 Page 8 C FAS ASSET DATE L NUMBR DESCRIPTION LOCATN Co ACORD A 01552 Dr. Lounge Fur 8610 05/88 A 01553 Health Promo F 8740 05/88 A 01559 PATIENT TVS 03/92 A 01560 M/R LASER PRIN 04/92 A 01561 FRAMED TVS 03/92 A 01562 ICEMAKER 03/92 A 01577 MICROTOME 03/92 A 01578 PT RM CURTAINS 6160 01/92 A 01579 FLOOR CARE EQ. 8460 01/92 A 01580 OB PULSE OXIME 01/92 A 01581 STERILIZER BAS 7420 01/92 A 01585 LAP CHOLI 7021 07/92 A 01586 IBM SYSTEM/36 8540 07/92 A 01587 VIP-RX COMPUTE 7170 07/92 A 01589 FUNITURE-MULT 9310 07/92 A 01590 LOBBY FURN-MUL 9310 07/92 A 01591 MISC FRAMED PR 8610 07/92 A 01592 MISC FRAMED PR 8610 07/92 A 01594 COMPUTER TERMI 9310 07/92 A 01595 DRAPES-PATIENT 6080 07/92 A 01596 MEDICAL CLINIC 9312 07/92 A 01597 BIOHAZARD HAMP 8460 07/92 A 01600 DRAPES-MULT S 9310 07/92 A 01607 FIBROSCOPE REP 7021 07/92 A 01609 RX CABINETS 7170 07/92 A 01611 ADMITTING EMBO 09/92 A 01612 AG PROCESSOR R 12/92 A 01614 OR JV EQUIP 10/92 A 01615 FIBERSCOPE REP 07/93 A 01616 OR VIDEO EQUIP 02/93 A 01618 PURCH. COMPUTE 10/92 A 01619 P.T. EXER EQPT 03/93 A 01636 M/SPEC TERMINA 07/92 A 01638 ACCUTEMP/08 AI 05/93 A 01640 ACCUTEMP AIR C 06/93 78 EXHIBIT "C" Calculation of Additional Rent CALCULATION OF ADDITIONAL RENT FOR THE ___ MONTHS ENDED ______ LEASE YEAR TO DATE GROSS REVENUES I _____________ BASE YEAR GROSS REVENUES ______________ II NUMBER OF MONTHS INTO LEASE YEAR ______________ III PRORATED BASE YEAR GROSS REVENUES (II/12*III) _____________ IV CURRENT LEASE YEAR TO DATE GROSS REVENUES IN EXCESS OF PRORATED BASE YEAR GROSS REVENUES (I-IV, BUT NOT LESS THAN 0) _____________ V CURRENT LEASE YEAR TO DATE ADDITIONAL RENT (V*__%) _____________ VI PRIOR PAYMENTS OF CURRENT YEAR ADDITIONAL RENT WITH RESPECT TO THE: PREVIOUS LEASE YEAR MINIMUM RENT AND ADDITIONAL RENT _____________ VII MAXIMUM ANNUAL RENT INCREASE (VII*__% FROM SECTION 6.2.1 OF THE LEASE) _____________ VIII PRORATED MAXIMUM ANNUAL RENT (VIII / 12) * 111 _____________ IX TOTAL PRIOR PAYMENTS OF CURRENT LEASE YEAR ADDITIONAL RENT _____________ X BALANCE DUE (LESSOR OF VI-X OR IX-X) _____________ XI C-1 79 EXHIBIT "D" Appraisal Process If Landlord and Tenant are unable to agree upon the Fair Market Value of the Premises within any relevant period provided in this Lease, each shall within ten (10) days after written demand by the other select one MAI Appraiser to participate in the determination of fair market value. Within ten (10) days of such selection, the MAI Appraisers so selected by Landlord and Tenant shall select a third MAI Appraiser. The three (3) selected MAI Appraisers shall each determine the fair market value of the Premises within thirty (30) days of the selection of the third appraiser. To the extent consistent with sound appraisal practices as then existing at the time of any such appraisal, and if requested by Landlord, such appraisal, shall be made on a basis consistent with the basis on which the Premises was appraised at the time of its acquisition by Landlord. Tenant shall pay the fees and expenses of any MAI Appraiser retained pursuant to this Exhibit. In the event either Landlord or Tenant fails to select a MAI Appraiser within the time period set forth in the foregoing paragraph, the MAI Appraiser selected by the other party shall alone determine the fair market value of the Premises in accordance with the provisions of this Exhibit and the fair market value so determined shall be binding upon Landlord and Tenant. In the event the MAI Appraisers selected by Landlord and Tenant are unable to agree upon a third MAI Appraiser within the time period set forth in the first paragraph of this Exhibit, either Landlord or Tenant shall have the right to apply at Tenant's expense to the presiding judge of the court of original trial jurisdiction in the county in which the Premises is located to name the third MAI Appraiser. Within five (5) days after completion of the third MAI Appraiser's appraisal, all three MAI Appraisers shall meet and a majority of the MAI Appraisers shall attempt to determine the fair market value of the Premises. If a majority are unable to determine the fair market value at such meeting, the three appraisals shall be added together and their total divided by three. The resulting quotient shall be the fair market value of the Premises. If, however, either or both of the low appraisal or the high appraisal are more than ten percent (10%) lower or higher than the middle appraisal, any such lower or higher appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two appraisals shall be added together and their total divided by two, and the resulting quotient shall be such fair market value. If both the lower appraisal and higher appraisal are disregarded as provided herein, the middle appraisal shall be such fair market value. In any event, the D-1 80 result of the foregoing appraisal process shall be final and binding. "MAI APPRAISER" shall mean an appraiser licensed or otherwise qualified to do business in the State and who has substantial experience in performing appraisals of facilities similar to the Premises and is certified as a member of the American Institute of Real Estate Appraisers or certified as a SRPA by the Society of Real Estate Appraisers, or, if such organizations no longer exist or certify appraisers, such successor organization or such other organization as is approved by Landlord. D-2 81 EXHIBIT "E" Permitted Exceptions 1. The standard printed exceptions, conditions and exclusions from coverage contained in the standard coverage owner's title policy then prevailing in use at the title company which consummates the sale transaction. 2. Any matters which an accurate survey of the Premises may show. 3. Any matters shown as title exceptions in that certain ALTA owner's policy of title insurance issued by Chicago Title Insurance Company in favor of Landlord in connection with Landlord's acquisition of the Premises from Tenant. 4. Such other matters burdening the Premises which were created with the consent or knowledge of Tenant or arising out of Tenant's acts or omissions. E-1 82 EXHIBIT "F" Annual Additional Rent Calculations Premises: ________________ Lease Year Ending ________________ Preliminary Additional Rent Current Year Gross Revenue $ __________(A) Base Year Gross Revenue $ __________(B) Current Year Incremental Revenue (A - B) $ __________(C) Preliminary Current Year Additional Rent (__% of C) $ __________(D) Add amount of unpaid rent accumulated from prior Lease Years pursuant to Section 2.6.5 of the Lease $ __________(E) Preliminary Additional Rent (D + E) $ __________(F) Maximum Additional Rent Prior Year Minimum Rent (Adjusted for increases pursuant to Section 5.7 of the Lease, if any) $ __________(G) Prior Year Additional Rent $ __________(H) Prior Year Total Rent (G + H) $ __________(I) Times (1 + Applicable Percentage) from Section 2.6.1 of Lease (I times [1 + Applicable Percentage] $ __________(J) Less Current Year Minimum Rent $ __________(K) Equals: Maximum Additional Rent Due (J - K) $ __________(L) Additional Rent Due Additional Rent Due (lesser of F or L) $ __________(M) Additional Rent paid by Tenant (refund paid by Landlord) for current year First Quarter (paid on) $ ______________ Second Quarter (paid on) $ ______________ Third Quarter (paid on) $ ______________ Fourth Quarter (paid on) $ ______________ Total Additional Rent Paid this Lease Year $ ______(N) Additional Rent due from Tenant (to be refunded by Landlord if less than zero) (M - N) $ ______ Accumulation pursuant to Section 2.6.5 of the Lease (D - M, but not less than zero) $_______ F-1 83 The undersigned represents, warrants and certifies to Nationwide Health Properties, Inc., a Maryland corporation, after due investigation, that the foregoing information is true, correct and complete. Tenant Brim Hospitals, Inc. By: ------------------------- Its: --------------------- F-2 84 EXHIBIT "G" ALTA Survey (Attached) G-1 85 DESCRIPTION PARCEL 1: A part of Tract No. 8 of the Bard Subdivision of the Rancho Ojai, in the City of Ojai, County of Ventura, State of California, as per map thereof recorded in Book 5, Page 25 1/2 of Maps, in the office of the County Recorder of said County, described as follows: Beginning at a 1-inch iron pipe set in the Southerly line of Meiners Road (formerly Matilija Road) at the Northeast corner of that certain parcel of land as conveyed to Hattie McDonnell Russell by deed recorded in Book 29, Page 262 of Official Records; thence from said point of beginning, 1st: South 73(degrees) 24' East 139.24 feet along the Southerly line of said Meiners Road to a ford axle set at the Northwest corner of that certain parcel of land as conveyed to Clara R. Barlow by deed recorded in Book 67, Page 181 of Official Records; thence, 2nd: South 18(degrees) 36' West 749.59 feet along the Westerly line of said lands of Clara R. Barlow and the Southwesterly prolongation of same; at 175.00 feet a ford axle set at the Southwest corner of said lands of Clara R. Barlow; at 749.59 feet a 1-inch iron pipe; thence, 3rd: North 73(degrees) 24' West 146.88 feet to a 1-inch iron pipe set at the Southeast corner of said lands of Hattie McDonnell Russell; thence, 4th: North 19(degrees) 11' East 749.90 feet along the Easterly line of said lands of Hattie McDonnell Russell to the point of beginning. PARCEL 2: A portion of Tract No. 8 of the Bard Subdivision of Rancho Ojai, in the City of Ojai, County of Ventura, State of California, according to the map recorded in Book 5, Page 25 1/2 of Maps, in the office of the County Recorder of said County, described as follows: Beginning at the Northeast corner of the land described in deed to Edward R. Lambert and wife, recorded July 1, 1953 in Book 1142, Page 222, Official Records; thence along the East line of said land, 1st: South 19(degrees) 11' West 751.50 feet to an angle point therein; thence, 2nd: South 73(degrees) 24' East 219 feet, more or less to the most Westerly corner of the land conveyed to Adam Rodriguez and wife by deed recorded in Book 680, Page 483 of Official Records; thence along the West line of said land of Rodriguez, 3rd: North 19(degrees) 11' East 749.90 feet to a point on the South line of Cuyama Road (formerly Matilija Road) 40 feet wide; thence along the Southerly line of said land, 4th: North 73(degrees) 24' West 218.96 feet to the point of beginning. EXCEPT from the Northerly 1.885 acres of said land an undivided 60% of all oil, gas and other hydrocarbon substances, without the right of entry above a depth of 500 feet from the surface of said land for the development of said oils and minerals, as reserved by George S. Biggers, et ux., in deed recorded February 19, 1959 in Book 1704, Page 278, Official Records. PARCEL 3: A portion of Tract No. 8 of the Bard Subdivision of Rancho Ojai, in the City of Ojai, County of Ventura, State of California, according to the map recorded in Book 5, Page 25-1/2 of Maps, in the office of the County Recorder of said County, described as follows: Commencing at the Northeast corner of the land described in deed to Edward R. Lambert and wife, recorded July 1, 1953 in Book 1142, Page 222 of Official Records; thence along the East line of said land, South 19(degrees) 11' West 751.50 feet to an angle point therein, said point being to the true point of beginning; thence continuing along said East line, 1st: South 16(degrees) 11' West 362.25 feet to a point in the Northerly line of that certain strip of land conveyed to Ventura County by deed recorded in Book 384, Page 436 of Official Records; thence 2nd: South 74(degrees) 55' East 205.80 feet to the Southwest corner of the land described in Parcel 1 deeded to William E. Weidemann, et al., recorded September 17, 1958 in Book 1654, Page 451 of Official Records; thence along the West line of the land last referred to, 3rd: Northerly in a direct line to the Northwest corner of said land, at the most Westerly corner of the land conveyed to Adam Rodriguez and wife by deed recorded in Book 680, Page 483, Official Records; thence, 4th: North 73(degrees) 24' West 219 feet, more or less to the point of beginning. [DIAGRAM] 86 EASEMENTS PER CHICAGO TITLE INSURANCE CO. NO. 575226-6 (6) 20' WIDE ROAD EASEMENT RESERVED B KENNETH P. GRANT PER BOOK 41. PAGE 297 OFFICIAL RECORDS (7) 6' WIDE UTILITY EASEMENT TO SOUTHERN CALIFORNIA EDISON CO. PER BOOK 1809. PAGE 525 OFFICIAL RECORDS (8) PUBLIC STREET EASEMENT TO THE CITY OF OJAI PER BOOK 3260. PAGE 255 OFFICIAL RECORDS (9) 6' WIDE UTILITY EASEMENT TO SOUTHERN CALIFORNIA EDISON CO. PER BOOK 3550. PAGE 211 OFFICIAL RECORDS (11) 6' WIDE UTILITY EASEMENT TO SOUTHERN CALIFORNIA EDISON CO. PER BOOK 3606. PAGE 279 OFFICIAL RECORDS (11A) CENTERLINE 10' WIDE UTILITY EASEMENT TO SOUTHERN CALIFORNIA EDISON CO. PER BOOK 3606. PAGE 279 OFFICIAL RECORDS [Diagram of [Diagram of OJAI VALLEY ONE STORY BUILDING COMMUNITY HOSPITAL OJAI MANOR (1&2 STORY BUILDING)] CONVALESCENT HOSPITAL NEW BEGINNINGS REHABILITATION CENTER] 87 [SURVEY] SURVEY CERTIFICATION To NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation, or its designee and CHICAGO TITLE INSURANCE COMPANY: This is to certify that this map or plat of survey is based on a field survey made on April 1, 1994, by me or directly under my supervision in accordance with "Minimum Standards Detail Requirements for ALTA/ACSM Land Title Surveys" jointly established and adopted by ALTA and ACSM in 1988, and to the best of my professional knowledge, information and belief, a) correctly represents the facts found at the time of survey; b) except as shown on survey map, there are no discrepancies between the boundary lines of the subject property as shown on the survey map and as described in the legal description of record; c) the boundary line dimensions as shown on the survey map form a mathematically closed figure within +/- 0.01 foot; d) except as shown on survey map, the boundary lines of the subject property are contiguous with the boundary lines of all adjoining parcels, roads, highways, streets or alleys as described in their most recent respective legal descriptions of record; e) the field survey meets the accuracy requirements of a Class A survey defined therein; f) the subject property does not lie within a flood zone as determined by the United States Department of Housing and Urban development; and g) The Premises do not lie within an "Earthquake Special Studies Zone" as designated under Alquist-Priolo Special Studies Zone Act (Sections 2621-2630), inclusive, of the California Public Resources Code. /s/ W.L. Meagher ------------------------------ WILLIAM L. MEAGHER LS #5948 CA [SEAL] LICENSED LAND SURVEYOR WM. L. MEAGHER EXP. 12/96 NO. 5948 STATE OF CALIFORNIA ALTA SURVEY OJAI MEDICAL CENTER VENTURA COUNTY ASSESSOR'S PARCEL 19-0-110-04, 19-0-110-33 and 110-0-1 CITY OF OJAI COUNTY OF VENTURA STATE OF CALIFORNIA DATE: APRIL 4, 1994 SHEET: 1 OF 1 88 [ASBUILT SURVEY] ---------------------- Scale 1 degree - 40 degrees BOOK 4000, PAGE 604 OFFICIAL RECORDS 1.75 ACRES BOOK 29, PAGE 262 OFFICIAL RECORDS 3.76 ACRES BOOK 680, PAGE 483 OFFICIAL RECORDS 2.47 ACRES BOUNDARY SURVEY ---------------------- Scale 1 degree - 100 degrees 89 ADDENDUM TO LEASE (OPTION TO PURCHASE) THIS ADDENDUM is dated as of April 11, 1994 and is attached to and made a part of that certain Lease and Security Agreement of even date herewith (the "LEASE") by and between Nationwide Health Properties, Inc., a Maryland corporation ("LANDLORD"), and Brim Hospitals, Inc., an Oregon corporation ("TENANT"). Provided no Event of Default has occurred under the Lease as of Tenant's exercise of its option to purchase the Premises pursuant to this Addendum or at the closing date established to consummate the purchase of the Premises pursuant to Tenant's exercise of such option, Tenant shall have the option to purchase the Premises upon the following terms and conditions: (a) Not more than five (5) days before or after the date which is twelve (12) months prior to the end of the then current Term, Tenant shall exercise its option to purchase all but not less than all of the Premises by giving Landlord written notice thereof; (b) The purchase price for the Premises shall be payable in cash by Tenant and shall be equal to the fair market value of the Premises on the date of Tenant's exercise of its option pursuant to this Addendum adjusted to take out any increase in value attributed to any improvements to the Premises made by Tenant and not funded or reimbursed by Landlord, provided that such purchase price shall not (i) be less than Landlord's Original Investment ($4,350,000) as increased pursuant to Section 5.7 of the Lease or decreased under Section 13.2 of the Lease, if either is applicable, nor (ii) exceed Landlord's Original Investment ($4,350,000) (as increased pursuant to Section 5.7 of the Lease or decreased under Section 13.2 of the Lease, if either is applicable) increased by three percent (3%) per annum compounded annually from the date of this Lease to the date of Tenant's notice of exercise of option hereunder. If within ten (10) days of the date of Tenant's exercise of its option under this Addendum Landlord and Tenant are unable to agree on the fair market value of the Premises, such fair market value shall be established by the appraisal process described on Exhibit "D" to the Lease. Such fair market value must be finally determined by a date ninety (90) days after Tenant's exercise of its option under this Addendum or Tenant shall lose its right to purchase the Premises; (c) Once the purchase price is established pursuant to the above, Landlord as seller and Tenant as buyer shall immediately open an escrow to consummate such purchase at a national title company selected by Landlord on the following 1 90 terms: (i) the form of such instructions to be then signed by Landlord and Tenant shall be such title company's standard sale escrow instructions without any representations or warranties and without due diligence or other contingencies in favor of the buyer, (ii) the purchase price shall be payable in cash by Tenant upon the expiration of the then current Term, (iii) all transaction costs shall be divided between Landlord and Tenant according to the customary practices in Southern California, (iv) at close, Landlord shall deliver title to the Premises subject only to those title exceptions shown on Exhibit "E" to the Lease, (v) the sale escrow instructions shall provide for a deposit equal to five percent (5%) of the purchase price and shall provide that the deposit may be retained by Landlord as liquidated damages in the event of any breach by Tenant of the terms of the escrow instructions (provided, however, such liquidated damages shall relate only to Landlord's damages by reason of a breach of the escrow instructions and shall in no way liquidate or limit Landlord's damages by reason of a breach of the Lease), and (vi) the escrow instructions shall otherwise be in form and substance reasonably satisfactory to Landlord and Tenant. (d) If Tenant fails to close the escrow for any reason other than a breach by Landlord, then Landlord shall have the right to extend the Term for an additional year. The Additional Rent and Minimum Rent during such year extension period shall be calculated as if on the date of Tenant's exercise of its option pursuant to this Exhibit Tenant had instead exercised its right under Section 1.2 of the Lease to extend the Term for a renewal term. IN WITNESS WHEREOF, Landlord and Tenant have executed this Addendum as of the day and year first above written. "LANDLORD" "TENANT" Nationwide Health Properties, Inc., Brim Hospitals Inc., a Maryland corporation an Oregon corporation By: By: /s/John R. Miller --------------------------------- ---------------------------- Its: Its: President ------------------------------ --------------------------- 2 91 AMENDMENT OF LEASE DOCUMENTS, CONSENT AND REAFFIRMATION (OJAI VALLEY COMMUNITY HOSPITAL) THIS AMENDMENT OF LEASE DOCUMENTS, CONSENT AND REAFFIRMATION ("AGREEMENT") is made as of December 16, 1996 by and among NATIONWIDE HEALTH PROPERTIES, INC., a Maryland corporation ("LANDLORD"), BRIM HOSPITALS, INC., an Oregon corporation ("TENANT"), and BRIM, INC., an Oregon corporation ("GUARANTOR"). R E C I T A L S: A. Landlord and Tenant have entered into that certain Lease and Security Agreement dated as of April 11, 1994 with respect to the Ojai Valley Community Hospital (the "LEASE"). All capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed to such terms in the Lease. B. Pursuant to that certain Guaranty of Lease dated as of April 11, 1994 (the "LEASE GUARANTY") executed by Guarantor, as guarantor, in favor of Landlord, Guarantor agreed to guarantee the obligations of Tenant under the Lease. Pursuant to that certain Guaranty of Obligations dated as of April 11, 1994 (the "ACQUISITION GUARANTY") executed by Guarantor, as guarantor, in favor of Landlord, Guarantor agreed to guarantee the obligations of Tenant under that certain Purchase and Sale Agreement dated as of April 11, 1994, by and between Tenant, as seller, and Landlord, as buyer. The Lease Guaranty and the Acquisition Guaranty are collectively referred to herein as the "GUARANTIES." C. In accordance with the terms of that certain Letter of Credit Agreement dated as of April 11, 1994, by and between Guarantor and Landlord, and accepted and agreed to by Tenant (the "L/C AGREEMENT"), Guarantor has caused a letter of credit in the amount of Two Hundred Three Thousand Six Hundred Twenty-Four Dollars ($203,624.00) to be issued to Landlord as additional security for the performance of Tenant's obligations under the Lease and Guarantor's obligations under the Lease Guaranty. D. The Lease, the Lease Guaranty, the L/C Agreement, together with all other documents, agreements or instruments evidencing and/or securing the transactions contemplated by the Lease shall be collectively referred to herein as the "LEASE DOCUMENTS". E. Concurrently herewith and pursuant to the terms and conditions of that certain Investment Agreement dated as of November 21, 1996, by and between Guarantor, Golder, Thoma, Cressey, Rauner Fund IV, L.P., a Illinois limited partnership, Martin Rash and Richard Gore (the "RECAPITALIZATION AGREEMENT"), guarantor will be recapitalized, and concurrently therewith Principal Hospital Corporation, a Delaware corporation, will merge with and into a wholly-owned subsidiary of Guarantor (collectively, the RECAPITALIZATION/MERGER 1 92 TRANSACTIONS"), which Recapitalization/Merger Transactions will result in a change in control over the management of the affairs of Guarantor. F. Tenant and Guarantor have requested that Landlord (i) consent to the Recapitalization/Merger Transactions, which consent is required under the terms of the Lease, and (ii) waive its rights to put the Premises to Tenant as a result of such Recapitalization/Merger Transactions. Landlord has agreed to consent to such requests of Tenant and Guarantor, in all cases upon and in consideration of the terms and conditions contained herein. NOW, THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. CONSENT BY LANDLORD. (a) Upon the terms and conditions contained herein and subject to the satisfaction of the conditions precedent set forth in Section 7 of this Agreement, Landlord hereby consents to the Recapitalization/Merger Transactions, and Landlord hereby waives any right it may have under the Lease Documents, including, without limitation, Section 22.3 of the Lease, to put the Premises to Tenant or to declare a default under the Lease Documents as a result of such Recapitalization/Merger Transactions. (b Tenant and Guarantor each acknowledge and agree that this consent is made solely for the benefit of Tenant and Guarantor and shall not be deemed, nor shall the same constitute, a waiver by Landlord of any rights under the Lease Documents, as amended and modified pursuant to the terms hereof, in the event of any subsequent event, including, without limitation, any subsequent event which may result in a deemed assignment of the Lease. 2. NO RELEASE. Nothing contained herein shall be deemed or construed to constitute a release of Tenant or Guarantor from any of their respective obligations under the Lease Documents. 3. AMENDMENTS TO LEASE. Subject to the satisfaction of the conditions precedent set forth in Section 7 of this Agreement, the Lease is hereby amended as follows: (a) The security deposit required under Section 11 of the Lease shall be increased to the sum of Five Hundred thousand Dollars ($500,000). (b) Section 10.1.4 of the Lease is hereby deleted in its entirety and the following is substituted therefor: "A default by Tenant or any Guarantor with respect to any obligation with a principal amount of at least One Million Dollars ($1,000,000) under any other lease or financing agreement with any other party, including, without 2 93 limitation, that certain Credit Agreement dated as of December 17, 1996 among First Union National Bank of North Carolina, a national banking association, as agent thereunder, the Lenders (as such term is defined therein) and Guarantor, which default is not cured within any applicable cure period provided in the documentation for such obligation;" (c) In addition to the option to purchase the Premises granted to Tenant by Landlord in the Addendum to Lease (Option to Purchase), the Lease is amended to provide that Tenant shall have an additional option to purchase the Premises upon the following terms and conditions: (i) No later than December 3, 1997, Tenant shall exercise its option to purchase all but not less than all of the Premises by giving Landlord written notice thereof; (ii) The purchase price for the Premises shall be payable in cash by Tenant and shall be equal to the product of (A) Landlord's Original Investment ($4,350,000) as increased pursuant to Section 5.7 of the Lease or decreased under Section 13.2 of the Lease, if either is applicable, and (B) one hundred eleven percent (111 %); and (iii) Landlord, as seller, and Tenant, as buyer, shall immediately open an escrow to consummate such purchase at a national title company selected by Landlord on the following terms: (A) the form of such instructions to be then signed by Landlord and Tenant shall be such title company's standard sale escrow instructions without any representations or warranties and without due diligence or other contingencies in favor of the buyer, (B) the purchase price shall be payable in cash by Tenant no later than ninety (90) days after Tenant's notice of exercise of its option to purchase, (C) Tenant shall pay all transaction costs, including, without limitation, all attorneys' fees and costs incurred by Landlord in connection with such transaction, (D) at close, Landlord shall deliver title to the Premises subject only to those title exceptions shown on Exhibit "E" to the Lease, (D) the sale escrow instructions shall provide for a deposit equal to five percent (5%) of the purchase price and shall provide that the deposit may be retained by Landlord as liquidated damages in the event of any breach by Tenant of the terms of the escrow instructions (provided, however, such liquidated damages shall relate only to Landlord's damages by reason of a breach of the escrow instructions and shall in no way liquidate or limit Landlord's damages by reason of a breach of the Lease), and (E) the escrow instructions shall otherwise be in form and substance reasonably satisfactory to Landlord and Tenant. 4. AMENDMENTS TO L/C AGREEMENT. Subject to the satisfaction of the conditions precedent set forth in Section 7 of this Agreement, the L/C Agreement is hereby amended as follows: 3 94 (a) The first sentence of Section l(b) of the L/C Agreement is hereby deleted in its entirety and the following is substituted therefor: "The aggregate amount of all issued and outstanding Letters of Credit shall, at all times during the term hereof as provided in Section 5 be Five Hundred Thousand Dollars ($500,000) (the "LETTER OF CREDIT AMOUNT")." 5. REPRESENTATIONS AND WARRANTIES. Tenant and Guarantor each hereby represent and warrant that: (a) all of the representations and warranties set forth in the Lease and the Guaranties, as applicable, are true and correct as of the date hereof as through originally make herein; (b) Tenant is in full compliance with Section 21.9 of the Lease; (c) this Agreement has been duly and validly authorized, executed and delivered by Tenant and Guarantor and constitutes the legally valid, binding and enforceable obligation of Tenant and Guarantor which has not and will not constitute a breach or default under any agreement, court order, judgment or law by or under which Tenant or Guarantor are bound or may be affected, subject to bankruptcy, insolvency and similar laws affecting the rights of creditors generally; (d) the Lease Documents are in full force and effect and are binding upon Tenant and Guarantor in accordance with their respective terms, subject to bankruptcy, insolvency and similar laws affecting the rights of creditors generally; and (e) no Event of Default exists under the Lease or Guaranties as modified by this Agreement and no event exists which, with the giving of notice or the passage of time, or both, would give rise to an event of Default under the Lease or Guaranties as modified by this Agreement. 6. REAFFIRMATION OF OBLIGATIONS. (a) Notwithstanding the modifications to the Lease contained herein, Tenant hereby acknowledges and reaffirms it obligations under the Lease (including, without limitations, it obligations concerning the environmental condition of the Premises set forth in Section 21.9 of the Lease and its indemnification obligations set forth in Section 23 of the Lease) and the other Lease Documents. (b) Notwithstanding the modifications to the Lease contained herein, Guarantor hereby acknowledges and reaffirms it obligations under the Guaranties, the L/C Agreement and all documents executed by Guarantor in connection therewith, and further agrees that any reference made in the Lease Guaranty or the L/C Agreement to the Lease 4 95 or any terms or conditions contained therein, shall mean such Lease, terms or conditions as modified by this Amendment. 7. CLOSING CONDITIONS, Landlord shall have no obligation to execute this Agreement, and the consent of Landlord set forth in Section 1 above shall not be effective prior to the closing of the Recapitalization/Merger Transactions and prior to the date (the "EFFECTIVE DATE") that Tenant and/or Guarantor, as applicable, has delivered or caused to be delivered to Landlord the following items, all of which shall be satisfactory in form and content to Landlord and, if applicable, duly executed (and acknowledged where necessary) by the appropriate parties thereto: (a) This Agreement; (b) A replacement Letter of Credit, additional Letter of Credit or an amendment to the Letter of Credit (as defined in the L/C Agreement) increasing the Letter of Credit Amount (as defined in the L/C Agreement) to Five Hundred Thousand Dollars ($500,000); and (c) A copy of the fully-executed Recapitalization Agreement. 8. ADDITIONAL REQUIREMENTS. Within thirty (30) days after the Effective Date, Tenant and/or Guarantor, as applicable, shall deliver or cause to be delivered to Landlord the following items, all of which shall be satisfactory in form and content to Landlord and, if applicable, duly executed (and acknowledged where necessary) by the appropriate parties thereto: (a) Any other material agreements entered into by Guarantor with respect to the Recapitalization/Merger Transactions which relate in any manner to the sale of Guarantor's stock; (b) Certified copies of all of the organizational documents with respect to Tenant and Guarantor which have not previously been delivered to Landlord (e.g., amendments to Articles of Incorporation and Bylaws and related filings with the State of Oregon), together with evidence satisfactory to Landlord that each of Tenant and Guarantor have taken all necessary action to authorize such party to execute, deliver and be bound by this Agreement and the other documents to be executed and delivered pursuant to the terms hereof; (c) Funds from Tenant and/or Guarantor in an amount sufficient to pay all attorneys' fees and costs incurred by Landlord in connection with this transaction; and (d) Such other documents, materials or information as Landlord may reasonably require. 9. SURVIVAL. The covenants, representations and warranties of Tenant and Guarantor set forth herein shall survive the consummation of the transactions contemplated hereunder. 5 96 10. EVENTS OF DEFAULT. The breach or default by Tenant and/or Guarantor of any term, covenant, agreement, condition, provision, representation or warranty contained herein, and the expiration of any applicable cure period set forth in any applicable Lease Document, shall constitute an "Event of Default" under the applicable Lease Document(s) and shall give Landlord the right, exercisable at Landlord's sole discretion, to pursue any or all of its applicable rights and remedies under such Lease Document(s). 11. EFFECT OF AGREEMENT. Except as expressly provided in this Agreement, the terms and conditions of the Lease Documents shall remain unmodified and in full force and effect. 12. MISCELLANEOUS. (a) Notices. The parties hereto notify each other that its address for receipt of notice hereunder or under the Lease Documents is as follows: TO TENANT AND/OR GUARANTOR: Brim, Inc. 305 N.E. 102nd Avenue Portland, Oregon 97220 Attention: Bruce A. Schoen Fax No: (503) 254-7619 With a copy to: The Nathanson Group 1411 Fourth Avenue, Suite 905 Seattle, Washington 98101 Attention: Randi S. Nathanson, Esq. Fax No: (206) 623-1738 TO LANDLORD: Nationwide Health Properties, Inc. 4675 MacArthur Court, Suite 1170 Newport Beach, California 92660 Attention: President and General Counsel Fax No: (714) 251-9644 6 97 With a copy to: Sherry & Holthouse LLP 610 Newport Center Drive, Suite 1200 Newport Beach, California 92660 Attention: Kevin L. Sherry, Esq. Fax No: (714) 719-1212 (b) NO WAIVER. No waiver of any breach of any representation or agreement contained herein shall be construed to be a subsequent waiver of that representation or agreement or of any subsequent breach thereof or of this Agreement. (c) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. (d) BURDEN AND BENEFIT. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their successors in interest and assigns. (e) ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties relating to the subject matters contained herein. Any oral representations or statements concerning the subject matters herein shall be of no force or effect. No variations or modification of this Agreement shall be valid and enforceable, except by an agreement in writing, executed and approved in the same manner as this Agreement. (f) HEADINGS. The headings used in this Agreement are for convenience only, and are not to be considered in connection with the interpretation or construction of this Agreement. (g) FURTHER INSTRUMENTS. Each party will, whenever and as often as it shall be reasonably requested so to do by another party, cause to be executed, acknowledged or delivered, any and all such further instruments and documents as may be necessary or proper, in the reasonable opinion of the requesting party, in order to carry out the intent and purpose of this Agreement. (h) COUNTERPARTS. This Agreement may be executed and acknowledged in counterparts, all of which executed and acknowledged counterparts shall together constitute a single document. Signature and acknowledgment pages may be detached from the counterparts and attached to a single copy of this document to physically form one document. (i) ATTORNEYS' FEES. In the event of any dispute or litigation concerning the enforcement, validity or interpretation of this Agreement, or any part thereof, the losing party shall pay all costs, charges, fees and expenses (including reasonable attorneys' fees) paid or incurred by the prevailing party, regardless of whether any action or proceeding is initiated relative to such dispute and regardless of whether any such litigation is 7 98 prosecuted to judgment. For the purpose of this Agreement, the term "attorneys' fees" or "attorneys' fees and costs" shall mean the fees and expenses of counsel to the parties hereto, which may include printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals and others not admitted to the bar but performing services under the supervision of an attorney. The terms "attorneys' fees" or "attorneys' fees and costs" shall also include, without limitation, all such fees and expenses incurred with respect to appeals, arbitrations and bankruptcy proceedings, and whether or not any action or proceeding is brought with respect to the matter for which such fees and expenses were incurred. (j) Submission of Agreement. The submission of this Agreement to Tenant or Guarantor or any of their respective agents or attorneys, for review or signature, does not constitute a commitment by Landlord to enter into this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. LANDLORD: NATIONWIDE HEALTH PROPERTIES, INC. a Maryland corporation By: /s/ Gary E. Stark ------------------------------ Gary E. Stark, Vice President TENANT: BRIM HOSPITALS, INC., an Oregon corporation By: /s/ ------------------------------ Its: President and C.E.O. --------------------------- GUARANTOR: BRIM, INC., an Oregon corporation By: /s/ ------------------------------ Its: Chief Executive Officer ------------------------- 8 EX-10.16 13 LEASE AGREEMENT DATED 12-16-85 1 EXHIBIT 10.16 LEASE AGREEMENT THIS LEASE AGREEMENT is made and entered into this 16 day of December 1985, by and between UNION LABOR HOSPITAL ASSOCIATION, A California public benefit corporation (hereinafter referred to as "LESSOR") and BRIM HOSPITALS, INC., an Oregon corporation (hereinafter referred to as "Lessee"). ARTICLE 1 DEMISE OF LEASED PREMISES Lessor for and in consideration of the rents, covenants and promises herein contained to be kept, performed and observed by Lessee does hereby lease and demise to Lessee, and Lessee does hereby rent and accept from Lessor, (i) all real property and improvements, constituting The General Hospital, an 84-bed, acute-care general hospital, located at 2200 Harrison Avenue, Eureka, California, (referred to as "the leased premises" or "the hospital"), and more particularly described in Exhibits A and B attached hereto and made a part hereof, (ii) all Group I, II and III Equipment, (iii) all the Hospitals patient and employee records and all medical records, X-ray films and records, laboratory records and medical and administrative libraries which are the property of Lessor. TO HAVE AND TO HOLD the said leased premises, together with all rights, privileges, easements, appurtenances and immunities belonging to or in any way appertaining to said leased premises, including, but not limited to, any and all easements, rights, title and privileges of Lessor now or hereafter existing in, to or under adjacent streets, sidewalks, alleys, party walls and property contiguous to the leased premises and reversions which may hereafter accrue to Lessor as owner of the leased premises by reason of the closing of any street, sidewalk or alley. ARTICLE 2 LEASE TERM 2.01 This Lease shall commence on January 1, 1986, (the "Commencement Date") and shall be for a term of ten (10) years, renewable at the option of Lessee for one additional five-year term at the end of the tenth year, upon delivery by Lessee of its written notice to Lessor of its intent to renew within 180 days prior to the termination of the current term. 2.02 In the event Lessee does not extend this Lease after the expiration of the initial lease term as provided in Paragraph 2.01, Lessor shall reimburse Lessee, at the expiration of said term, the book value (as determined by the 2 straight line method of depreciation) of any equipment installed by Lessee during said term. Payment under this provision shall be made to Lessee within ninety (90) days of such termination. Leasehold improvements are subject to the provisions of Article 18, and are not intended to be covered in this Section. 2.03 If Lessee shall hold over after the expiration of the initial lease term or any extension thereof, such tenancy shall be from month to month and on the same terms as herein set forth. ARTICLE 3 RENT 3.01 Lessee agrees to pay the Lessor as rental for the use and occupancy of the leased premises pursuant to this lease as shown in the schedule in Exhibit C attached hereto and made a part hereof. Said rental shall be due to Lessor thirty (30) days before the due dates reflected in Exhibit C attached hereto. 3.02 All installments of rent shall be payable in lawful money of the United States to the Lessor at the address set out herein for notice purposes, or Lessee shall provide the rent to Lessor's agent at the Hospital, or as otherwise agreed between the parties. 3.03 In the event that any rent installment is not paid on the date due, that sum shall bear interest at the rate of ten (10) percent per annum from the date due until payment is made. ARTICLE 4 TAXES 4.01 In addition to the rental, Lessee covenants that it will pay and discharge all taxes, assessments, water rates, meter charges and other charges which may be assessed or which may be or may become liens upon the leased premises or the interest therein of any beneficiary under any deed of trust, and will make such payments or cause such payments to be made in due time to prevent any delinquency thereon or any forfeiture or sale of the leased premises or any part thereof, and will produce to the Lessor receipts for all such payments or other evidences satisfactory to the Lessor. Lessee shall have the right in good faith at its sole cost and expense (in its own name or in the name of Lessor, or both, as Lessee may determine appropriate) to contest any such taxes, charges, and assessments, and shall be obligated to pay the contested amount only if and when it is finally determined to be due. It is agreed, however, that in no -2- 3 event will Lessor's interests or that of any beneficiary under any deed of trust be threatened because of this provision. 4.02 Subject to the right of the Lessee to contest taxes, assessments and governmental charges as hereinabove provided, Lessor may at any time that the payment of any item of taxes, special assessments or governmental charges which Lessee is obligated to pay under the provisions of Section 4.01 remain unpaid, give written notice to Lessee of its default, specifying the same, and if Lessee continues to fail to pay such item of taxes, special assessments or governmental charges or to contest the same in good faith, then, at any time after ten (10) days from such written notice, Lessor may pay the items specified in the notice and Lessee covenants thereupon on demand to reimburse and pay Lessor any amount so paid or expended in the payment of the items specified in the notice and any penalties associated with such payment by Lessor. ARTICLE 5 UTILITIES Lessee shall pay or cause to be paid all charges for water, heat, gas, electricity, sewers and any and all other utilities used on the leased premises throughout the term of this lease including any connection fees. ARTICLE 6 USE OF PREMISES It is agreed that the use of the leased premises is and shall be limited to the operation and maintenance of an acute-care or specialty hospital and related facilities incidental thereto, including, but not limited to, parking facilities or medical office buildings. Lessee agrees that it shall maintain and operate the leased premises, and all engines, boilers, pumps, machinery, apparatus, fixtures, fittings and equipment of any kind in or that shall be placed in any building or building now or hereafter at any time in the leased premises, in good repair, working order and condition, normal wear and tear excepted, and that it will subject to all the other conditions of this Lease, from time to time make or cause to be made all needful and proper replacements, repairs, renewals and improvements so that the efficiency and value of the leased premises shall not be impaired, normal wear and tear excepted. -3- 4 ARTICLE 7 IMPROVEMENTS AND BUILDINGS 7.01 Lessee shall maintain all improvements and buildings constructed on the leased premises owned by Lessor in a good state of repair, normal wear and tear excepted. Lessor shall have no obligation whatsoever with respect to maintenance or repair of any improvements or buildings located on the leased premises and owned by Lessor. 7.02 Should the leased premises or any portion of said premises, or any building or improvement on said premises, be damaged or destroyed by any cause whatsoever, Lessee shall within one (1) year from the date of such damage or destruction, commence the work of repair, reconstruction or replacement of the damaged or destroyed building and prosecute the same with reasonable diligence so that the building shall be restored to substantially the condition it was in prior to the casualty. During such repair and restoration, at Lessee's option, this lease shall abate and Lessee shall exercise its option according to Article 19 herein, or the lease shall not abate and rent will continue to be due and payable. Such option concerning replacement shall be exercised in writing within forty-five (45) days after such destruction. 7.03 Notwithstanding any other provision of this Lease, Lessee may terminate this Lease should the leased premises or the improvements on said premises, be damaged or destroyed during the term of this Lease or any extension thereof to such an extent it will cost more than 25 percent of the replacement value of all improvements on said premises immediately prior to the damage or destruction to restore said premises to the condition they were in immediately prior to the damage or destruction. In such event, Lessee may exercise its option to terminate this Lease by giving written notice of termination to Lessor and this Lease shall be terminated as of 12:01 a.m. on, whichever last occurs, the date the notice is given to Lessor or the date Lessee completes vacating said premises; provided, however, that should Lessee terminate this Lease pursuant to this section, all insurance proceeds payable because of the damage or destruction shall be, first payable to the bank according to the then present amount of the obligation to the bank as described in the Agreement, and the remainder shall be apportioned as the respective interests of the Lessee and Lessor in the remaining leasehold. 7.04 Lessee shall not suffer or permit any mechanics' liens or other liens to be filed against the fee of the leased premises nor against Lessee's leasehold interest in the land nor any buildings or improvements on the leased premises by reason of any work, labor, services or materials -4- 5 supplied or claimed to have been supplied to Lessee or to anyone holding the leased premises or any part thereof through or under Lessee unless Lessee is in good faith contesting the claim or amount of any claim of any such mechanic or materialman or other lien claimant, in which case, Lessee shall indemnify and save Lessor harmless from any liability for damages occasioned thereby and shall in the event of a final judgment of foreclosure on any such lien, cause the same to be discharged and removed prior to the execution of such judgment. 7.05. The term "replacement value" as used herein shall mean the actual replacement cost thereof from time to time, less exclusions provided in the normal fire insurance policy. In the event either party believes that full replacement value (with the then replacement cost less exclusions) has increased or decreased, it shall have the right, but only, except as provided below, at intervals of not less than five (5) years, to have such full "replacement value" re-determined by the fire insurance company which is then carrying the largest amount of fire insurance carried on the premises, hereinafter referred to as "impartial appraiser". The party desiring to have full replacement value so re-determined shall forthwith, on receipt of such determination by such impartial appraiser, give written notice thereof to the other party hereto. The determination of such impartial appraiser shall be final and binding on the parties hereto, and Lessee shall forthwith increase, or may decrease, the amount of insurance carried pursuant to this section, as the case may be, to the amount so determined by the impartial appraiser. The requesting party shall pay the fee, if any, of the impartial appraiser. If, during any such five-year period, Lessee shall have made improvements to the premises, Lessor may at his own cost have such full replacement value re-determined at any time after such improvements are made, regardless of when the full replacement value was last determined. ARTICLE 8 EMINENT DOMAIN 8.01 A. "Eminent Domain" as used herein is the right of the government to take private property for public use. As used in this Article, the words "condemned" and "condemnation" are coextensive with such right, and a voluntary conveyance by Lessor to the condemnor under threat of a taking under the power of eminent domain in lieu of or after commencement of formal proceedings shall be deemed a taking within the meaning of this article. B. As used in this Article, the terms "total condemnation" and "total taking" mean the taking of the entire leased premises under the power of eminent domain or a -5- 6 taking of so much of the leased premises under such power as, in the judgment of the parties, to prevent or substantially impair the conduct of Lessee's business thereon. C. As used in this Article, the terms "partial condemnation" and "partial taking" mean any condemnation of the leased premises other than a total taking as defined in subparagraph B of this section. 8.02 A. In the event that there shall be a total taking of the leased premises during the lease term or any extension thereof under the power of eminent domain as in this Article defined, the leasehold estate hereby created shall cease and terminate as of the date title to the property is taken by the person who will put it to public use or at the time the condemnor is authorized to take possession of the property as stated in an order for possession, whichever is earlier. B. All compensation and damages awarded for such total taking shall first be paid to the Bank of America to satisfy the obligations under the Note Purchase Agreement, and Lessee shall have a claim thereto to the extent of the remainder of the then current lease term, and hereby irrevocably assigns and transfers to the Bank of America any prior rights it may have to compensation or damages to which it may become entitled; provided, however, that Lessee shall be entitled to receive any award made for the taking of or damage to Lessee's fixtures and any improvements made by Lessee to the leased premises which Lessee would have had the right to remove but for the condemnation, on expiration or sooner termination of this lease. C. On termination of this Lease by a total taking of the leased premises under the power of eminent domain, all rentals and other charges payable by Lessee to or on behalf of Lessor under the provisions of this Lease shall be paid up to the date on which actual physical possession of the leased premises shall be taken by the condemnor, and the parties hereto shall thereafter be released from all further liability in relation thereto. 8.03 A. In the event that there shall be a partial taking of the leased premises during the Lease term or any extension thereof under the power of eminent domain as in the Article defined, this Lease shall terminate as to the portion of the leased premises so taken on the date title to the property is taken by the person who will put it to public use or at the time the condemnor is authorized to take possession of the property as stated in an order for possession, whichever is earlier, but this Lease shall at Lessee's option, continue in force and effect as to the remainder of the leased premises, provided, however, that the rent payable by Lessee for the balance of the term where Lessee elects to continue the Lease shall be abated to the -6- 7 extent that it is fair, just, and equitable to both Lessee and Lessor, taking into consideration, among other relevant factors, the number of licensed beds and/or the square footage affected by such taking or condemnation. Such option shall be exercised by Lessee in writing within forty-five (45) days after such taking. B. On such partial condemnation as in this section provided, all compensation and damages awarded for such partial taking shall belong to and be the sole property of Lessor, and Lessee shall have no claim thereto and hereby irrevocably assigns and transfers any rights to share in the award, except to receive any award made for the taking of, or damage to any fixtures or improvements or to the leased premises which Lessee would have had the right to remove but for the condemnation on expiration or sooner termination of this Lease. In the event that this Lease is continued as to the portion of the premises not condemned, any award made for alterations, modifications, or repairs which may be reasonably required in order to replace the remaining portion of the leased premises not taken to substantially the same condition it was prior to the taking, shall be for Lessee's benefit so that it may place said premises in a suitable condition for the continuance of Lessee's tenancy. C. On termination of this Lease in whole or in part as herein provided, all rentals and other charges payable by Lessee to or on behalf of Lessor hereunder shall be paid up to the date on which actual physical possession shall be taken by the condemnor, and, in the event that the Lease is totally terminated, the parties hereto shall thereafter be released from all further liability in relation thereto, and, in the event that the Lease is only partially terminated, Lessee shall thereafter be liable only for rent in an amount in proportion to the amount of the leasehold remaining. ARTICLE 9 INSURANCE 9.01 Lessee covenants that it will promptly procure, or cause to be procured, and will maintain insurance against loss or damage to the leased premises by fire and perils covered by extended coverage insurance in an amount at least equal to the amount of the Lessor's obligations to the Bank of America and to other lenders from time to time outstanding hereunder, subject to deductible conditions in an amount not to exceed $5,000. Lessee shall also maintain boiler insurance in an amount customary for similar facilities and will maintain public liability insurance in the minimum amount of $5,000,000 liability to any one person for personal injury, $500,000 liability to any one person for property damage and $5,000,000 liability for any one accident, with a -7- 8 deductible amount of not more than $5,000 per person or $25,000 per occurrence. Lessee will carry malpractice insurance in the minimum amount generally deemed adequate for its business and consistent with insurance coverage or reserves as maintained by hospitals of similar nature and size in the State of California. Lessee will also carry business interruption insurance covering interruption of the Hospital's operations at the leased premises in whole or in part by reason of the total or partial suspension of or interruption in hospital operation caused by the damage to or destruction of any part of the leased premises, with such exceptions as are customarily imposed by insurers, covering a period of suspension or interruption of at least two fifteen (15) calendar months, with a minimum limit in an amount not less than the maximum payments to be made pursuant to the rent for twelve (12) consecutive months thereafter. Lessee shall maintain fidelity bonds on all its officers and employees who collect or have access to or have custody of the revenues or any other funds of the Lessee in such amount as is customarily carried by like organizations. Lessee further covenants and agrees that it will at all times carry and maintain such other insurance of the types and in amounts which are customarily carried by other hospitals of a similar nature in the State of California. All policies evidencing insurance required by this section shall be carried in the name of Lessee, with the Lessor and the Bank of America as their interest may appear named as additional insureds where such may be done without additional expense to Lessee, and shall provide that all losses thereunder shall be made payable directly to the Lessor, subject to this Agreement and Lessee's interests hereunder, except for (1) all policies of fire and extended coverage insurance carried by the Lessee on the leased premises, which shall be so written as to make any loss payable to the Lessor and the Bank of America as their interests may appear, and (2) liability insurance, which may be payable to the claimants thereof. 9.02 In the event of any loss or damage covered by any policy of fire or extended coverage insurance, any appraisal or adjustment of such loss or settlement or payment of indemnity therefore which shall be agreed upon between the Lessee and any insurer shall, upon the written request of the Lessor, be consented to and accepted by the Bank of America. All insurance monies received by Lessee on account of any loss or damage to the leased premises covered by any policy of fire or extended coverage insurance under any of the provisions of this Section 9.02 shall to the extent of the Bank's present day lien in the Hospital be deposited with and held by the Bank of America in the Insurance Proceeds Account which it has established pursuant to its loan agreement with Lessor. 9.03 All insurance hereunder shall be carried by insurance companies authorized to do business in the State of -8- 9 California or otherwise acceptable to Lessor and the Bank of America. In the event that an insurance carrier not authorized to do business in the State of California is selected by Lessee to write the insurance required by this lease, Lessor shall not unreasonably withhold consent of said insurance company. Lessee agrees to deliver to the Lessor and to the Bank of America before June 1 of each year a certificate showing as of April 1 of such year a schedule in detail setting forth the insurance policies purchased by the Lessee then outstanding and in full force and effect upon or in connection with the leased premises, including the names of the insurers which have issued the policies, the amounts thereof, the property or risks covered thereby (including liability risks), the expiration date of the policy and the fact, where applicable, that there is attached to each policy a mortgage clause in favor of the Bank of America. ARTICLE 10 INDEMNIFICATION Lessor shall not be liable for any loss, damage or injury of any kind or character to any person or property arising from any use of the leased premises or any part thereof, or caused by any defect in any building, structure or other improvement thereon or in any equipment or other facility therein, except that Lessee shall have no liability for any loss, damage, or injury resulting from any latent defect of which Lessee has neither actual nor constructive notice thereof. Lessor shall not be liable for any loss, damage, or injury of any kind or character to any person or property caused by or arising from any act or omission of Lessee or of any of Lessee's agents, employees, licensees or invitees, or by or from any accident on the land or any fire or other casualty on the leased premises, or occasioned by the failure of Lessee to maintain the leased premises in a safe condition, or arising from any other cause whatsoever. Lessee hereby waives, on its behalf, all claims and demands against Lessor for any such loss, damage or injury of Lessee, and hereby agrees to defend, indemnify, save and hold Lessor entirely free and harmless from all liability for any such loss, damage or injury of other persons and from all costs and expenses arising therefrom but only to the extent that such loss, damage or injury is not caused by or does not result from any action by the Lessor. ARTICLE 11 ASSIGNMENT AND SUBLEASE 11.01 The Lessee will not sell, assign, mortgage or transfer this lease, sublet the premises or any part thereof, or allow any transfer hereof, or allow any lien upon the -9- 10 Lessee's interest by operation of law, without the prior written consent of the Lessor, which consent shall not be unreasonably withheld by Lessor. 11.02 Any sale, assignment, mortgage, transfer or subletting of this lease which is not in compliance with the provisions of this article shall be of no effect and void. This provision is inapplicable if Lessee exercises the purchase options granted to it under Article 15 or Article 19 herein below. ARTICLE 12 INDIGENT CARE 12.01 Lessee shall provide for and care for all patients diagnosed by a licensed staff physician as seriously ill or requiring emergency services without regard for the ability of such patients to pay for services rendered in the Hospital emergency room. 12.02 Lessor agrees to negotiate in good faith with Humboldt County, California officials for the transfer of the Hospital's obligations and rights under that certain Agreement dated October 31, 1975, between the County and Lessor, to reimburse Lessor for medical services provided to indigent persons and other County patients, pursuant to Paragraph 21.7 of said Transfer Agreement. Lessor agrees to assign Lessee its rights, benefits, obligations and interest in the aforementioned contract with the County. ARTICLE 13 DEFAULT BY LESSEE Should Lessee default in the performance of any covenant, condition or agreement in this lease and such default is not corrected within twenty (20) days after receipt of written notice thereof from Lessor, and Lessee has not commenced to correct said default and is not diligently attempting to effect a correction within ten (10) days after receipt of written notice from Lessor to Lessee of such default, Lessor may declare this Lease and all rights and interests created by it to be terminated. Whereupon, this lease shall cease and come to an end as if that were the day originally fixed herein for the expiration of the term hereof, except that Lessor shall be responsible for the obligations provided in Section 2.02 herein. Lessor, its agents or attorney, may resume possession of the leased premises and relet the same for the remainder of the term at the best rent Lessor, its agent or attorney may obtain for the account of Lessee, who shall make good any deficiency. -10- 11 ARTICLE 14 WARRANTIES Subject to the interest of the Bank of America and the other obligees of Lessor, Lessor covenants and agrees that Lessee, on paying the rent and other charges herein provided for observing and keeping the covenants, conditions and terms of this Lease on Lessee's part to be kept or performed shall lawfully and quietly hold, occupy and enjoy the leased premises during the term of this Lease and any extensions thereof without any hindrance, disturbance or ejectment by Lessor, its successors or assigns, or by any other person or persons lawfully claiming the same, except such portion of the leased premises, if any, as shall be taken under the power of eminent domain. ARTICLE 15 TRANSFER TO THIRD PARTY Lessor grants to Lessee a right of first refusal to purchase the leased premises on the same terms and conditions as a bona fide offer received by Lessor for the leased premises by a third party or at the "option price" referred to in Article 19, whichever is the lesser. After receipt of notice of such bona fide offer and the terms thereof, Lessee shall have sixty (60) days to give notice of exercise of its right of first refusal. The Closing shall take place within ninety (90) days from the date Lessee exercises its option, or as soon thereafter as Lessee is reasonably able to obtain all necessary national, state, and local approvals. This option shall be binding on any party subsequently obtaining title to the leased premises. Transfer to a third party shall trigger the responsibilities of Lessor under Section 2.02 and Section 18.02 herein. ARTICLE 16 SKILLED NURSING FACILITY OPERATIONS 16.01 Lessee has been notified by Lessor of Lessor's lease of certain of Lessor's contiguous property to Coastal Care Center, Inc. The parties agree that, except as provided herein, Lessee shall have no rights or responsibilities relative to said Skilled Nursing Facility. 16.02 Lessee shall have a right of first refusal, should such right become available to Lessor, with respect to the Skilled Nursing Facility upon sale of the Skilled Nursing Facility to Coastal Care Center, Inc. (or any other third party purchaser) and Coastal Care Centers' subsequent sale thereof. Lessee shall also have the right of first refusal, should such right become available to Lessor, to lease the -11- 12 Skilled Nursing Facility. The right shall be exercised on the same terms as specified in Article 15 of this Lease. Lessor agrees to utilize its best efforts to cause the lease agreement described in Section 16.01 to give Lessee the benefit of this Section 16.02. 16.03 If Lessee or any other party shall purchase that Skilled Nursing Facility, the net proceeds thereof, after all direct expenses to Lessor/Seller of that sale, shall be applied by the Lessor/Seller to pay down the Promissory Note given by Lessor to Bank of America dated January 26, 1979 (which Note is secured by the real property which is the subject of this Lease). If the proceeds of the nursing facility exceed the amount required to retire that Note of January 26, 1979, all net excess proceeds shall be applied in payment of that Promissory Note dated December 8, 1976, which Note was given by Lessor to Bank of America and is secured by the real property which is the subject of this Lease. ARTICLE 17 LESSOR'S APPROVAL OF EQUIPMENT Lessor shall have the right to approve equipment added to the Hospital which cannot be removed without damaging the Hospital's physical facilities, which expenditures exceed $10,000 per item. Lessor's approval shall not be unreasonably withheld. Lessee shall make the request for such approval in writing; when such request is received, the Lessor shall notify Lessee of its decision in writing signed by the Lessor's Chairman within thirty-five (35) days after receipt of such requests or such request shall be deemed approved. Lessee may violate or ignore this provision without breaching or defaulting under this Lease; provided, however, that should Lessee violate this provision, Lessor shall have no obligations under Section 2.02 as to that item of equipment not approved by Lessor. Lessee shall not remove such items on termination of the Lease under Section 2.02 herein. ARTICLE 18 LESSOR'S APPROVAL OF CAPITAL IMPROVEMENTS 18.01. Lessor shall have the right to approve those capital improvements to the Hospital in excess of twenty-five thousand dollars ($25,000.00) which cannot be removed without damaging the Hospital's facilities. Except as set forth below, this approval is limited to the right to be provided and to approve copies of plans and specifications for the construction of said capital improvements, for the purpose of assuring that no improvement will compromise the structural integrity of the Hospital or decrease the value of Lessor's -12- 13 property; further, Lessor shall have the right to inspect all construction and to require that said construction of capital improvements is done in a workmanlike manner. 18.02. In the event that (a) a proposed capital improvement would increase the fair market value of Lessor's property, or result in the hospital offering services not presently available, and (b) in the further event that said capital improvement cannot be depreciated over the life of the initial term of the lease or sooner in accord with generally accepted accounting principles, and (c) in the further event that Lessee does not extend this lease after the expiration of the initial lease term as provided in Paragraph 2.01, then Lessor shall reimburse Lessee the actual book value of said capital improvements as determined by the actual depreciation schedule used by Lessee. Lessee shall utilize a depreciation schedule that depreciates the improvements as rapidly as permitted under accounting principles generally accepted by the Hospital Industry. Lessee shall provide Lessor, on an annual basis, copies of all book entries relative to any such capital improvements at the time of each annual review. Payment under this provision shall be made to Lessee within one hundred eighty (180) days from the termination of the lease or as agreed otherwise between the parties at the time of approval of said project by Lessor. ARTICLE 19 LESSEE'S PURCHASE OPTION Lessor grants to Lessee, during the Lease term or any extensions or renewals thereof, an option to buy the leased premises for an amount equal to the unpaid outstanding long-term indebtedness of Lessor as of the date the option is exercised. Lessee shall exercise its option hereunder by giving Lessor written notice of its irrevocable intent to exercise the option. The Closing shall take place within ninety (90) days from the date the Lessee exercises its option, or as soon thereafter as Lessee is reasonably able to obtain all necessary permits and approvals. Closing costs shall be apportioned as standard in the local area. This option, during the Lease term or any extensions or renewals thereof, shall be binding on any party subsequently obtaining title to the leased premises subject to the rights of Lessor's mortgagees and other obligees. ARTICLE 20 GENERAL PROTECTIVE PROVISIONS 20.01 Lessee shall permit Lessor or Lessor's agents, representatives or employees to enter onto the leased premises for the purpose of inspection to determine whether Lessee is in compliance with the terms of this lease or for -13- 14 the purpose of showing the leased premises to prospective lessees, purchasers, mortgagees or beneficiaries under trust deeds. 20.02 The relationship between Lessor and Lessee at all times shall remain solely that of landlord and tenant, and shall not in any fashion be deemed a partnership or joint venture. 20.03 Neither bankruptcy, insolvency, assignment for the benefit of creditors nor the appointment of a receiver shall affect this lease so long as all covenants of Lessor are continued in performance by Lessee or Lessor and their respective successors or legal representatives. 20.04 No waiver by Lessor or Lessee of any default or breach of any covenant, condition or stipulation herein contained shall be treated as a waiver of any subsequent default or breach of the same or any other covenant, condition or stipulation hereof. ARTICLE 21 EMPLOYEES Although Lessor understands and agrees that Lessor cannot bind Lessee relative to the retaining of the present employees of the Hospital, Lessee represents that it is the intention of Lessee to maintain the current staff and that reasonable efforts will be made to insure that the transfer of the Hospital does not result in the loss of employment for any current employees, provided the present employees satisfy Lessee's employee performance standards. Nothing in this provision shall be deemed to create any rights of said employees to bring an action against Lessee for wrongful termination in the event they are not so retained. ARTICLE 22 COMPLIANCE WITH LEGAL REQUIREMENTS Lessee shall at its sole cost and expense at all times throughout this lease comply with all laws, statutes, ordinances, and governmental rules, regulations and requirements now in force or which may hereafter be in force, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the leased premises, insofar as it relates to or affects the condition, use or occupancy of the premises. -14- 15 ARTICLE 23 MISCELLANEOUS 23.01 All sums other than rent, notices, demands or requests from one party to another may be personally delivered or sent by mail, certified or registered, postage prepaid, to the addresses stated in this paragraph, and shall be deemed to have been given at the time of personal delivery or three days after the time of mailing. Either party may change its address for notice purposes hereunder but such change and shall become effective only upon actual receipt of notice of such change. All notices, demands or requests from Lessee to Lessor shall be given to Lessor at 123 "F" Street, Eureka, California 95501, or at such other address as Lessor shall request in writing. All payments, notices, demands or requests from Lessor to Lessee shall be given to Lessee, c/o K. David McAllister, 177 N.E. 102nd Avenue, Portland, Oregon 97220, or at such other address as Lessee shall request in writing. 23.02 This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. 23.03 This Agreement shall be construed under and in accordance with the laws of the State of California. 23.04 In case of any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and this agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 23.05 This Agreement constitutes the sole and only agreement of the parties hereto and supersedes any prior understandings or written or oral agreements between the parties respecting the within subject matter. 23.06 No amendment, modification or alteration of the terms hereof shall be binding unless the same be in writing, dated subsequent to the date hereof and duly executed by the parties hereto. 23.07 In the event Lessor or Lessee breach any of the terms of this agreement whereby the party not in default employs attorneys to protect or enforce its rights hereunder and prevails, then the defaulting party agrees to pay the other party reasonable attorneys' fees so incurred by such -15- 16 other party, including attorneys' fees in all litigation and all appeals. 23.08 Lessor agrees that it will from time to time and at any reasonable time execute and deliver to Lessee such other and further instruments and assurances as Lessee may reasonably request approving, ratifying and confirming this Lease and the leasehold estate created hereby and certifying that the same is in full force and effect and that no default thereunder on the part of Lessee exists except that if any default on the part of Lessee does exist, Lessor shall specify in said certificates each such default. 23.09 The signatories to this lease for both Lessor and Lessee hereby warrant that they have the authority to make this lease, and that their signature to this lease is binding upon their corporation. This Lease has been executed by the parties on the date and year first above written. LESSOR: UNION LABOR HOSPITAL ASSOCIATION By: /s/ ------------------------------ Chairman, Board of Directors ATTEST: /s/ - ------------------------------ LESSEE: BRIM HOSPITALS, INC. By: /s/ ------------------------------- ATTEST: /s/ David McAllister - ----------------------------- -16- 17 EXHIBIT C LEASE PAYMENT SCHEDULE
YEAR TOTAL AMOUNT DUE SCHEDULE OF PAYMENTS PER YEAR - ---- ---------------- ----------------------------- 1981 $1,595,736.00 January 1 $ 5,000.00 ------------- ------------- May 1 1,018,875.00 ------------- November 1 313,500.00 ------------- December 1 258,361.00 ------------- 1982 885,361.00 May 1 313,500.00 ------------- ------------- November 1 313,500.00 ------------- December 1 258,361.00 ------------- 1983 1,207,523.00 May 1 478,500.00 ------------- ------------- November 1 470,662.00 ------------- December 1 258,361.00 ------------- 1984 1,176,174.00 May 1 462,825.00 ------------- ------------- November 1 454,988.00 ------------- December 1 258,361.00 ------------- 1985 1,144,823.00 May 1 447,150.00 ------------- ------------- November 1 439,312.00 ------------- December 1 258,361.00 ------------- 1986 1,113,474.00 May 1 431,475.00 ------------- ------------- November 1 423,638.00 ------------- December 1 258,361.00 ------------- 1987 1,082,123.00 May 1 415,800.00 ------------- ------------- November 1 407,962.00 ------------- December 1 258,361.00 ------------- 1988 1,050,773.00 May 1 400,125.00 ------------- ------------- November 1 392,287.00 ------------- December 1 258,361.00 ------------- 1989 1,019,421.00 May 1 384,449.00 ------------- ------------- November 1 376,611.00 ------------- December 1 258,361.00 ------------- 1990 988,069.00 May 1 368,773.00 ------------- ------------- November 1 360,935.00 ------------- December 1 258,361.00 -------------
Exhibit C 18 EXHIBIT C LEASE PAYMENT SCHEDULE
YEAR AMOUNT DUE SCHEDULE OF PAYMENTS PER YEAR ---- ---------- ----------------------------- 1991 $ 713,356.00 May 1 $353,097.00 ------------ ----------- November 1 345,259.00 ----------- December 1 $ 5,000.00 ----------- 1992 672,004.40 May 1 337,421.00 ------------ ----------- November 1 329,583.00 ----------- December 1 5,000.00 ----------- 1993 640,652.00 May 1 321,745.00 ------------ ----------- November 1 313,907.00 ----------- December 1 $ 5,000.00 ----------- 1994 699,500.00 May 1 306,069.00 ------------ ----------- November 1 298,231.00 ----------- December 1 5,000.00 ----------- 1995 577,948.00 May 1 290,393.00 ------------ ----------- November 1 282,555.00 ----------- December 1 5,000.00 ----------- 1996 546,596.00 May 1 274,717.00 ------------ ----------- November 1 266,879.00 ----------- December 1 5,000.00 ----------- 1997 515,244.00 May 1 259,041.00 ------------ ----------- November 1 251,203.00 ----------- December 1 5,000.00 ----------- 1998 483,892.00 May 1 243,365.00 ------------ ----------- November 1 235,527.00 ----------- December 1 5,000.00 ----------- 1999 452,510.00 May 1 227,689.00 ------------ ----------- November 1 219,851.00 ----------- December 1 5,000.00 ----------- 2000 416,155.00 May 1 212,013.00 ------------ ----------- November 1 204,175.00 -----------
19 EXHIBIT "A" - HOSPITAL TRACT 2 ------- DESCRIPTION All that real property in the City of Eureka, County of Humboldt, State of California, described as follows PARCEL ONE That portion of Parcel 2 of Parcel Map No. 1302, according to said map as filed in the Recorder's Office of Humboldt County on May 18, 1978 in Book 11 of Parcel Maps, Page 102, described as follows: Beginning at the northeast corner of Parcel 2 of said parcel map; thence along the boundary line of said Parcel 2 the following courses: S 89 deg. 32'14"W, 331.09 feet; S 00 deg. 19'47"E, 127.37 feet; S 89 deg. 37'00"W, 79.27 feet; S 00 deg. 23'07"E, 216.40 feet; thence leaving said boundary line, S 00 deg. 23'07" E, 41.00 feet; thence S 89 deg. 53'50" E, 22.53 feet to the beginning of a curve concave to the south having a radius of 40 feet; thence easterly along said curve 45.76 feet to a point in a non-tangent line (a radial line through said point bearing N 65 deg. 39'14" E thence S 4 deg. 56' W 9.43 feet to the beginning of a non-tangent curve concave to the east having a radius of 500 feet, a radial line of said curve through said beginning of curve bearing N 84 deg. 47'47" W; thence southerly along said curve 181.81 feet (through an angle of 20 deg. 50'04")") to a point in a non-tangent line (a radial line of said curve through said point bearing S 74 deg. 22'09" W); thence S 16 deg. 57' E, 60.13 feet to the beginning of a non-tangent curve concave to the west having a radius of 524.50 feet, a radial line of said curve through said beginning of curve bearing N 73 deg. 25'28" E thence southerly along said curve 36.50 feet (through an angle of 3 deg. 59'14") to the north line of Parcel 1 of said Parcel Map No. 1302; thence along said north line S 74 deg. 29' E, 60.56 feet to an angle point in said line; thence along said north line N 89 deg. 48' E, 250.75 feet to the east line of said Parcel 2; thence along said east line N 0 deg. 12' W. 709.15 feet to the point of beginning. PARCEL TWO Non-exclusive rights of way for ingress, egress and utilities in and over Hardy Drive and Woolford Drive as shown on the Record of Survey on file in the Recorder's Office of Humboldt County in Book 31 of Surveys, page 97. 20 EXHIBIT "B" - HOUSES TRACT 3 ------- DESCRIPTION All that real property in the City of Eureka, County of Humboldt, State of California, described as follows: That portion of Parcel 2 of Parcel Map No. 1302, according to said map as filed in the Recorder's Office of Humboldt County on May 10, 1978 in Book 11 of Parcel Maps, page 102, described as follows: Beginning at the most westerly corner of Parcel 1 of said Parcel Map; thence N 89 deg. 54'15" W. 229.05 feet to a point in a non-tangent curve concave to the northeast having a radius of 275.0 feet, a radial line of said curve through said point bearing S 66 deg. 20'17" W; thence southerly along said curve 128.60 feet (through an angle of 26 deg. 47'37") to the south line of said Parcel 2, being the north line of 23rd Street; thence along said north line of 23rd Street N 89 deg. 48' E, 303.55 feet to the west line of Parcel 1 of said Parcel Map No. 1302; thence along said west line, N 0 deg. 12' W. 100.0 feet to an angle point in said line; thence N 89 deg. 54'15" W. 150.94 feet to the point of beginning. 21 SHADED PORTIONS REFLECT PROPERTY DESCRIBED IN EXHIBITS "A" AND "B" [MAP] 22 1995-9445-7 Recorded-Official Records Humboldt County, California RECORDING REQUESTED BY, AND Carolyn Crnich, Recorder WHEN RECORDED RETURN TO: Recorded by BOGLE & GATES Rec Fee 25.00 Jonathan A. Eddy Clerk: MM Total: 25.00 Bogle & Gates Apr 18, 1995 at 12:34 Two Union Square CONFORMED COPY 601 Union Street Seattle, Washington 98101-2346 COLLATERAL ASSIGNMENT OF OPTION This COLLATERAL ASSIGNMENT OF OPTION (the "Assignment") is entered into as of this 17th day of January, 1995, by and between Brim Hospitals, Inc., an Oregon corporation ("Hospitals") and Key Bank of Oregon, a national banking association ("Agent"). RECITALS A. This Assignment concerns certain real property and the improvements thereon (the "Property"), legally described on Exhibit A attached hereto. The Property is subject to a Lease Agreement dated December 16, 1985, by and between Union Labor Hospital Association ("Union Labor") and Hospitals, as amended or otherwise modified by a First Amendment to Lease Agreement dated December 16, 1985, an Agreement Re Release of Real Property from Lease dated May 21, 1987, a Third Amendment to Lease Agreement dated as of June 20, 1989 (the "Third Amendment to Lease"), a Fourth Amendment to Lease Agreement dated June 18, 1992, and a Fifth Agreement to Lease Between Union Labor Hospital Association and Brim Hospitals, Inc. (the Lease Agreement, as so amended and as otherwise amended or otherwise modified from time to time, being the "Lease"). The Lease Agreement or a memorandum of the Lease Agreement was recorded in the records of Humboldt County, California, on May 13, 1988, under number 9172, in volume 1873 official records, at page 895. B. Pursuant to Article 19 of the Lease (as amended by the Third Amendment to Lease) Hospitals has been granted an option to purchase the Property (the "Option"). C. Hospitals is also a Guarantor of certain obligations of its parent company, Brim, Inc. (the "Company"), under the terms of that certain Revolving Credit Agreement dated January 17, 1995, by and among Brim, Inc., Key Bank of Oregon as agent, and the banks ("Banks") named as Banks therein (the "Credit Agreement"). D. Hospitals has evidenced its guaranty of such obligations by executing a Guaranty of approximate even date with the Credit Agreement. E. Hospitals will benefit directly and indirectly from the entry of the Company into the Credit Agreement. 1 23 F. It is a condition of the Banks agreement to extend certain credit under the Credit Agreement that Hospitals assign as security for its Guaranty the Option. NOW THEREFORE THE PARTIES AGREE AS FOLLOWS: 1. ASSIGNMENT FOR SECURITY. As security for the payment and performance of all Hospitals' obligations under that certain Guaranty of approximate even date herewith, Hospitals hereby absolutely assigns to Agent all Hospitals' right, title and interest in the Option; provided that, until an Event of Default shall have occurred and be continuing under the Credit Agreement, Agent shall have no right to exercise the Option. 2. PROCEDURE UPON DEFAULT. Upon the occurrence of an Event of Default under the Credit Agreement and only so long as said Event of Default shall be continuing, Agent shall be entitled to exercise all rights of a secured party under the California Uniform Commercial Code Sections 9501 et. seq., and following foreclosure of its security interest as provided therein, shall be entitled to exercise the Option upon the terms and conditions provided in the Option. 3. ASSIGNMENT PRESENT AND ABSOLUTE. This Assignment is present and absolute, and until a reassignment of the Option to Hospitals pursuant to Section 4 below, Hospitals shall retain no right to exercise the Option. 4. REASSIGNMENT. Agent agrees that at such time as no Loans are outstanding under the Credit Agreement, and no further Commitment of the Banks exists, and all obligations of the Company under the Credit Agreement have been fully satisfied, Agent will execute and deliver a reassignment of the Option to Hospitals, and will upon request provide written notice of such reassignment to Union Labor. Agent further agrees that, upon the request of Hospitals, it will reassign the Option to Hospitals or Hospital's nominee if, but only if, the conditions specified in Section 2.12(a)-(c) of the Credit Agreement are satisfied. 5. DEFINED TERMS. Terms used as defined terms herein and not defined herein are used as defined in the Credit Agreement. 6. CONSENT TO RECORDATION. This Assignment shall be recorded in the real property records of Humboldt County, California. 7. GOVERNING LAW. This Assignment shall be governed by the laws of the State of California. BRIM HOSPITALS, INC. By /s/ John Miller ----------------------------------- Its President ----------------------------------- 2 24 KEY BANK OF OREGON, as Agent By /s/ ----------------------------- Its Vice President ----------------------------- The undersigned acknowledges the foregoing Assignment and consents thereto. This consent is subject to the transferee's obtaining, at or around the time title to the property is transferred, the consent to and/or approval of such transfer by the Humboldt County Hospital Authority, and/or any other similar approval which may be required at such time. UNION LABOR HOSPITAL ASSOCIATION By SEE NEXT PAGE ---------------------------------- Its ---------------------------------- STATE OF OREGON COUNTY OF MULTNOMAH On March 15, 1995 before me Kay B. Larson personally appeared John R. Miller of Brim Hospitals, Inc., an Oregon corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS by my hand and official seal. Signature /s/ Kay B. Larson (Seal) ----------------------------------- Notary Public in and for said County and State 3 25 The undersigned acknowledges the foregoing Assignment and consents thereto, which consent is subject to the procurement of any required approvals and/or consents from any governmental authority and/or agency asserting jurisdiction in connection with any transfer of title to the property. UNION LABOR HOSPITAL ASSOCIATION By: /s/ ------------------------------ Its President 26 STATE OF OREGON County of Multnomah On March 15, 1995 before me Diane M. Smith personally appeared Evan B. Lloyd of Key Bank of Oregon, a national banking association, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS by my hand and official seal. Signature /s/ Diane M. Smith --------------------------------------- [Seal] Notary Public in and for said County and State STATE OF California County of Humboldt On March 21, 1995 before me Marla D. Walters personally appeared Ted W. Loring, M.D. of Union Labor Hospital Association, a California public benefit corporation, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS by my hand and official seal. Signature Marla D. Walters [Seal] ----------------------------- Notary Public in and for said County and State 4 27 ASSIGNMENT Except as provided herein, the Union Labor Hospital Association (hereinafter "the Association"), for value received, hereby assigns to The Hospital Corporation of California (hereinafter "HCC"), all its existing rights and obligations described in the Transfer Agreement dated October 31, 1975, and Amendments thereto between the Association and the County of Humboldt, a copy of which is attached hereto and incorporated by reference herein. It is understood that the Assignment herein shall not include any rights or duties described in the following provisions of the Transfer Agreement: 1. Paragraphs 4(b), 5(3) (iii), and 14(b). 2. Paragraph 21.2.6. 3. Paragraph 21.14, and all other rights and duties relative to long-term care, said rights and duties having been previously assigned to Coastal Care Centers, Inc., on or about May 15, 1980. The Assignment herein is made upon the following terms and conditions: 1. The Association shall remain responsible and liable for all obligations excepted from the Assignment herein. 2. HCC shall continue to make the General Hospital's services fully available to Medi-Cal and Medicare recipients. 3. HCC shall make available to the Board of Supervisors and the County Administrative Officer of the County of Humboldt, for inspection purposes only, at its offices in the General 28 Hospital, Eureka, California, all public documents which can be released without permission by the hospital, to the extent permitted by law. 4. If HCC, to whom the Association assigns certain of its rights and duties under the October 31, 1975, contract between the Association and the County of Humboldt, fails in any way to perform said duties as required by the contract, the Association will perform or arrange for the satisfactory performance of said duties. 5. Pursuant to the lease of the General Hospital by HCC from the Association, HCC agrees to indemnify Humboldt County (the "County"), its employees and the members of the County Board of Supervisors, both individually and collectively, their successors or assigns, due to any claims concerning the County's authority to approve the assignment of the Transfer Agreement dated October 31, 1975, and the Amendments thereto between the Association and the County of Humboldt (the "Assignment"), in any amounts not to exceed Ten Thousand Dollars ($10,000.00). HCC shall reimburse County, on demand, for any payment by County at any time after the date of that; Assignment with respect to any liability, obligation, or claim to which the foregoing indemnity by HCC relates up to Ten Thousand Dollars ($10,000.00) 6. Except as provided in Paragraph 5 above, the Association shall provide legal defense to any action, suit or proceeding instituted to contest the validity of this agreement, and shall hold County of Humboldt, its officers, agents and employees, free and harmless from liability for loss, damage, or injury to -2- 29 It is further understood that this agreement shall become void and of no effect in the event that Union Labor Hospital Association and/or the Hospital Corporation of America and Hospital Corporation of California fails to perform the conditions set forth in Humboldt County Resolution No. 81-26. Wherefore, this Agreement Amendment has been executed this 24th day of February, 1981. COUNTY OF HUMBOLDT By: /s/ Danny Walsh ------------------------- Chairman of the Board of Supervisors of the County of Humboldt, State of California (SEAL) ATTEST: DONALD R. MICHAEL - ----------------------------------- County Clerk and ex officio Clerk of the Board of Supervisors of the County of Humboldt, State of California By: Doris L. Smith -------------------------- Deputy Clerk UNION LABOR HOSPITAL ASSOCIATION By: /s/ Harry Britini ------------------------------ President and By: /s/ ------------------------------ Secretary APPROVED AS TO FROM: /s/ - ------------------------------------ Special Counsel - 2 - 30 persons or property arising out of or attributable to the Association assigning its responsibility to operate the General Hospital facility to HCC. 7. Hospital Corporation of America (HCA), the parent company of HCC, guarantees the performance by HCC of all the terms and conditions of this Assignment which are obligations of HCC, and agrees to be bound thereby. Dated: March 20, 1981 UNION LABOR HOSPITAL ASSOCIATION By: /s/ Hampton ---------------------------- -3- 31 ACCEPTANCE OF ASSIGNMENT Hospital Corporation of California hereby accepts the foregoing assignment, and agrees to perform all duties and obligations to be performed by the Union Labor Hospital Association under the contract as specified herein to the same extent as if said corporation had been an original party thereto, and agrees to save, indemnify, defend and hold the Union Labor Hospital Association harmless from all liability for performance or nonperformance of such duties and obligations. HOSPITAL CORPORATION OF CALIFORNIA Dated: 4/10/81 By: /s/ Leon W. Hooper ------------------ -------------------------------- Attested By: /s/ -------------------------------- Hospital Corporation of America agrees to the terms and conditions of the Assignment herein. Dated: 4/10/81 HOSPITAL CORPORATION OF AMERICA ------------------ By: /s/ Leon W. Hooper -------------------------------- Attested By: /s/ -------------------------------- APPROVAL OF ASSIGNMENT The County of Humboldt consents to the assignment as set forth in Humboldt County Resolution No. 81-26, provided however -4- 32 that this consent shall become void and of no effect in the event that Union Labor Hospital Association and/or the Hospital Corporation of America and California fails to perform the conditions set forth in Humboldt County Resolution No. 81-26. Dated: February 24, 1987 COUNTY OF HUMBOLDT By /s/ Danny Walsh ----------------------------------- Chairman of the Board of Supervisors the County of Humboldt, State of California (SEAL) ATTEST: /s/ DONALD K. MICHAEL - --------------------------------------------- County Clerk and ex officio Clerk of the Board of Supervisors of the County of Humboldt, State of California By: /s/ Doris L. Smith ----------------------------------------- Deputy Clerk APPROVED AS TO FORM: /s/ - -------------------------------------------- Special Counsel -5- 33 AGREEMENT PROVIDING FOR TRANSFER OF OPERATIONAL CONTROL AND OWNERSHIP OF HUMBOLDT MEDICAL CENTER TO GENERAL HOSPITAL TWELFTH AGREEMENT AMENDMENT That certain agreement dated October 31, 1975, by and between the COUNTY OF HUMBOLDT and UNION LABOR HOSPITAL ASSOCIATION relative to transfer of Humboldt Medical Center to General Hospital is hereby amended as follows: 1. Paragraph 21.2.1 is deleted. 2. Paragraph 21.2.2 is deleted. 3. Paragraph 21.2.3 is deleted. 4. Paragraph 21.2.5 is deleted. 5. The last sentence of Paragraph 21.3 is deleted. 6. Paragraph 21.4.3 is deleted. 7. Paragraph 21.4.4 is deleted. 8. Paragraph 21.7.1 is deleted. The following is substituted therefor: "The County shall pay General for medical services rendered pursuant to this Agreement at the Medi-Cal rate, less Return on Equity Portion. Such rate shall include physicians' services performed by physicians who are hospital based and whose services are billed by the hospital, such as radiology, pathology, and emergency room physician services." 9. Paragraph 21.7.2 is deleted. 10. Paragraph 21.7.3 is deleted. 11. Paragraph 21.10 is deleted in its entirety (including subparagraphs 21.10.1 and 21.10.2). It is understood that this Agreement shall have prospective application only. 34 ASSUMPTION AGREEMENT THIS AGREEMENT, dated December 31, 1985, by and among HOSPITAL CORPORATION OF AMERICA, a Tennessee corporation (hereinafter "HCA"), HOSPITAL CORPORATION OF CALIFORNIA, a California Corporation, ("HCC") and BRIM Hospital, Inc., an Oregon Corporation (hereinafter "Brim") a subsidiary of HillHaven Corporation, a Tennessee Corporation. Preliminary Statement On February 6, 1981, HCC and HCA entered into a lease agreement with the Union Labor Hospital Association, a California public benefit corporation, for the lease of the General Hospital in Eureka, California ("the Lease"). In connection with such Lease HCC and HCA established certain deposits in Eureka, California relating to the operation of the hospital, maintains certain obligations for prepaid expenses, placed certain personnel in place at the General Hospital and will collect certain receivables at the termination of such Lease. Brim has entered into a lease to begin January 1st, 1986 with the Union Labor Hospital Association concerning the General Hospital and will require the services of a controller on a consulting basis at the 35 General Hospital for the period January 1, 1986 - March 31, 1986. Now THEREFORE, in consideration of the premises, and the mutual covenants and agreements of the parties hereinafter set forth, it is hereby agreed by and among the parties as follows: Section 1.01. Transfers. At the termination of Lease, HCC and HCA will sell transfer, convey, assign and deliver to Brim all HCC'S and HCA's rights, title and interest in the following: a. Deposits. All deposits currently relating to the operation of the General Hospital at such deposits' actual value as more specifically set out in Exhibit A hereto. b. Maintenance Agreement. All prepaid expenses relating to the operation of the General Hospital at the remaining value of such prepaid expenses as more specifically set out in Exhibit B hereto. c. Inventory. All current inventory at the General Hospital as of December 31, 1985. The price will be determined by a physical inventory to be taken on Monday, December 30 1985, adjusted for disbursements through midnight, December 31, 1985. HCA and HCC will accept liability for payments of all items included in the physical inventory but not paid at December 31, 1985. Brim shall accept liability for all items ordered during the normal course of -2- 36 business through December 31, 1985 which are received after December 31, 1985. d. Records. All patient medical records, minutes of the Board of Trustees, the Medical Staff and quality assurance records. Brim shall afford HCA reasonable access to such records and minutes to facilitate HCA's collection of accounts, legal activities and responses to governmental requirements. Such transfer will be made at no charge to Brim. e. Prepaid Admissions' Deposits. All prepaid admissions' deposits for future patient care at the General Hospital after the termination of the Lease shall be transferred to Brim at no charge. Section 1.02. Operational Issues. At the termination the Lease HCC and HCA will bill Brim for certain services as follows: a. A one time fee for access to HCA's Customer Support Services division on the General Electric Computer System for a period of one year as more specifically set out in Exhibit C hereto: b. A monthly fee of Four Thousand Five Hundred Dollars ($4,500.00) representing a portion of the salary and benefits of the HCA controller, at the General Hospital, James Keeler. The controller shall manage the controller functions of the General Hospital for Brim so long as the controller is overseeing the collections of HCC/HCA's receivables in Eureka, -3- 37 California. The controller will remain an employee of HCA at all times under the terms of this Agreement. Section 2.01. Receivables. At the termination of the Lease HCC and HCA shall retain all patient receivables incurred through the last day of the Lease. These receivables shall be collected by employees of Brim under the supervision of HCA's controller or such other person as HCA may designate. HCA shall pay Brim the actual salaries, plus benefits (at twenty-five percent of the salaries) to be billed to HCA at the end of each pay period with payment no later than fifteen (15) days after receipt by HCA of such invoices for Brim employees' time. a. Under current Medicare regulations interim bills for Medicare patients in-house on December 31, 1985 may not be processed. Upon discharge charges accumulated under the Lease for HCA (from admissions through December 31, 1985) will be combined with charges accumulated under Brim (from January 1, 1986 through discharge) and billed to the program as one complete bill. All payments received for these amounts (including DRG, patient deductibles and co-insurance) shall be prorated on a basis of charges to charges between HCA and Brim and paid to HCA by Brim no later than ten (10) days after receipt by Brim. Section 3.01. Brim agrees as a part of this Agreement to pay HCC and HCA no later than fifteen (15) days after termination of the Lease the following: a Deposits b. Prepaid Expenses -4- 38 c. Inventory d. Monthly fees for Controller, To Be Paid per Section 1.02b e. G.E. Service Agreement and Equipment Charges (Exhibit C). Section 4.01. Notices. All notices, requests, demands and other communications shall be in writing and shall be deemed to have been duly given, if delivered or mailed, first class postage prepaid, to the parties at their respective addresses reflected on Exhibit D hereto. Section 5.02. Cancellation or Amendment. This Agreement may not be cancelled or amended other than by, and only by, a written instrument executed by HCA, HCC, and Brim. Section 5.03. Expenses. Each party to this Agreement shall pay its own costs and expenses (including, without limitation, the fees and expenses of its counsel, auditors, and accountants fees) incidental to the preparation and carrying out of this Agreement. Section 5.04. Survival of Representation and Warranties. The representations and warranties and covenants contained herein shall survive termination of the Lease and any investigation by the parties with respect thereto. Section 5.05. Attorneys' Fees. Should any party hereto institute any action or proceeding in court to enforce any provision hereof of for damages by reason of an alleged breach of any provision of this Agreement, the -5- 39 prevailing party shall be entitled to recover from the losing party or parties such amounts as the court may adjudge to be reasonable attorneys' fees for services rendered to the prevailing party in such action or proceeding. The term "prevailing party" as used in this Section 5.05 shall include, without limitation, any party who is made a defendant in litigation without damages and/or other relief may be sought against such party and a final judgment or decree is entered into such litigation in favor of such party defendant. Section 5.06. Section and Other Headings. The section and other headings contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. Section 5.07. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. Section 5.08. Parties in Interest. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. Section 5.09. Applicable Law. This Agreement shall be construed in accordance with the laws of the State of California. Section 5.10. Invalidity of Any Provisions. It is the intention of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent -6- 40 permissible under the laws and public policies of each state and jurisdiction in which such enforcement is sought, and that the unenforceability (or modification to conform with such laws or public policies) of any provision of this Agreement shall be deemed invalid or unenforceable in whole or in part, this Agreement shall be deemed amended to delete or modify, in whole or in part, if necessary, the invalid or unforceable provisions, or portions thereof, and to alter the balance of this Agreement in order to render the same valid and enforceable. Section 5.11. Entire Agreement. This Agreement expresses the whole agreement between the parties, there being no representations, warranties, or other agreements not herein set forth or provided for. Section 5.12. Authorization for Agreement. The Execution and performance of this Agreement by HCC, HCA and Brim has been duly authorized by all necessary laws, resolutions or corporate action, and this Agreement constitutes the valid and enforceable obligations of HCC; and Brim in accordance with its terms. -7- 41 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first written above. "HCC" Hospital Corporation of California By: /s/ Ronald J. Elder ----------------------------------- Administrator "BRIM" BRIM, a division of Hillhaven Corporation By: /s/ John R. Miller ----------------------------------- "HCA" Hospital Corporation of America By: /s/ Ronald J. Elder ----------------------------------- Administrator -8- 42 EXHIBIT A DEPOSITS ARA $6.200.00 Total $6,200.00 Both balances were brought forward from ULHA. Files indicate balance audited by Ernst & Whinney for 9/30/80 financial statements. 43 EXHIBIT B PREPAID EXPENSES
VENDOR PURPOSE AMOUNT - ------ ------- ------ California Thoracic Society Blood Gas Professional Testing $ 275.00 Elec. Office Equipment PMA's - typewriters, 18 @ $100. 00 each 1,800.00 Amer. Soc. of Hosp. Pharmacists Publication 450.00 Pitney Bowes 3 Months Postage Meter 125.61 Times Standard Public Notice/Liquor License 11.00 General Electric PMS for January 3,378.00 IBM PMA on 2 typewriters for 3 months 352.50 Phillips Ultrasound PMA 681.25 Eureka Oxygen Manifold Rental 840.04 Coulter Electronics PMA 2,442.66 Radiometer America Service Contract Copiers 2,416.74 JCAH Survey Fee 1,300.00 ---------- $14,072.80 ========== Petty Cash Funds 375.00 ---------- $14,447.80
44 EXHIBIT C 1. HCA shall provide EDP systems/services through our existing agreement with General Electric. 2. Term: Beginning January 1, 1986 through mid-January, 1987 (coincident with the final processing for the month of December, 1986). 3. Fees/Charges/Consulting: (a) General Electric will bill direct for: 1. $4,500 one-time set-up fee to download and convert existing master files for operational use by the new entity. 2. Monthly "Ongoing Systems Costs". per "General Electric's Transaction Price Schedule" under the present master agreement between HCA and GE. Should specific charges be modified/added or deleted as to HCA, those charges shall be accepted as to this agreement. (b) HCA will bill directly for: 1. $2,400 one-time fee for access to HCA Customer Support Services for the term of this agreement. Should this agreement terminate prior to December 31, 1986, this fee shall be prorated at the rate of $200 per month and the difference refunded. 4. The equipment which is the property of GE/HCA and all systems manuals and documentation which is the property of HCA shall be returned to HCA at the termination of this agreement. 5. HCA shall be held harmless for non-payment of charges direct-billed by General Electric. 45 ONGOING SYSTEM COSTS April 16, 1984 GENERAL ELECTRIC'S TRANSACTION PRICE SCHEDULE *Invoiced Monthly to Participating Hospitals or Corporate*
Owned Hospital Unit of Charge Per Unit Description Measure Of Measure - ----------- ------- --------------- A. Basic Services 1. Inpatient Processing Patient Day .73 2. Outpatient Processing Outpatient Visit .20 3. Industrial Account Charge Transaction .05 Processing 4. Medical Reporting Each Final UB-82 Bill .25 Processing 5. Microfiche Copies Microfiche .25 (Mailed to Participating Hospitals) 6. Long Term Beds Patient Day .40 (Psychiatric Hospitals) 7. Financial System Reports Patient Day .05 (Full System) 8. Financial Systems Reports Per User #, Per Month 100.00 (OIC Only) 9. Financial Systems Reports Per User #, Per Month 150.00 and General Ledger Option (OIC Only) 10. Accounts Payable System Patient Day .06 11. Excess A/P Generated Each .10 Checks 12. Excess Vendors Each .05 13. Excess Vouchers Each .05 14. Alpha Vendor List Per Vendor .02 15. File Retention Per Account .10 Excess A/R Accounts
46
Owned Hospital Unit Of Charge For Unit Description Measure of Measure ----------- ------- ---------------- 16. Excess A/R Follow-up Each Listed Excess .05 Listing Account 17. Excess A/R Statements Each Statement .10 18. Physicians Census Report Date Line .01 19. Care Unit Census Date Line .01 Report 20. Info Bill w/o Detail Each Bill .25 20A. Discharge Pay w/o Detail Each Bill .25 21. Info Bill w/Detail Each Bill .30 22. Final Bill w/Detail Each Bill .30 23. Interim Bill w/Detail Each Bill .30 24. Department Summary Bill Each Bill .10 25. Detailed A/R Aging Data Line .02 Report 26. Weekly A/R Cross Each Excess Listed A/R .02 Reference Report Account with No Current Activity 27. Cumulative Credit Each Account Listed .03 Balanced Register 28. A/R Detailed Activity Date Line .01 Report 29. Collection Agency Each Record .02 Records Transmittal 30. Bad Debt Ledgers Each Record .05 31. Payroll Labels Each Label .04 31A. Requestable Payroll Labels Each Label .07 32. Payroll Custom Reports Data Line .02 33. Payroll Expanded Data Line .04 Custom Reports 34. Physicians Bill Each Bill .15
47
Owned hospital Unit Of Charge Per Unit Description Measure of Measure ----------- ------- ---------- 35. Excess Inventory Date Line .01 Requests 36. Labor Productivity Each Department .50 Report 37. A/R Custom Reports Same As A/R (Long Form) Follow-up Listing 38. A/R Custom Reports Date Line .02 (Short Form) +.001 Per Account 39. Employee Status Reports Per Employee .10 (Quarterly Fiche) 40. Employee Status Reports Per Employee .25 Special Request 41. Starr Workpapers Per Request 20.00 42. Requested Preliminary Per Request 20.00 Close Trial Balance and Financial Statements 43. Notice of Admission Per Notice .05 44. A/P Cross-Reference Per Lines In Excess of .25 500 Line per Calendar Month 45. Medical Staff Data Line .01 Activity Report Minm.5.00 46. Medicare DRG By Medical Data Line .02 Staff Member Report Minm 5.00 47. Patient Origin Index Each Report 5.00 Report 48. Financial Census Report Data Line .01
48 DEFINITIONS DATA LINE: A line on an output report containing the data pertinent to the content of the report. This specifically excludes Header or Title lines. Specifications for Individual reports may exclude certain Summary or Total Lines. EXCESS ACCOUNTS RECEIVABLE ACCOUNTS: Those accounts in the Accounts Receivable application that are determined to have a balance aged over 180 days as of preliminary close. EXCESS ACCOUNTS RECEIVABLE FOLLOW-UP: The number of account entries appearing on the Follow-Up Collection List Reports produced by the Accounts Receivable application throughout a given month in excess of 25% of the number of accounts on file at the end of said month. The number of account entries are accumulated weekly. At Month-End, the calculation is: multiply number of accounts on file by .25 and subtract the accumulated number of account entries. A positive result represents excess Accounts Receivable Follow-Up entries. EXCESS ACCOUNTS RECEIVABLE STATEMENTS: The number of statements printed for all accounts purged from the Accounts Receivable file at the end of a given month in excess of three (3) per inpatient and/or outpatient visits. This figure is arrived at on an account level by multiplying number of visits by 3, and subtracting this from number of statements generated for this account. Any positive result is accumulated by hospital, and represents excess Accounts Receivable statements. INDUSTRIAL ACCOUNT: An account is so classified in the Accounts Receivable application. Said accounts are identified by the characters "IND" in positions 68 through 70 on the Patient Data Record of the A/R Master File. OUTPATIENT VISIT: All charge transactions representing services provided to an outpatient in a single day, and posted to said outpatient's account during the period being invoiced. Said charge transactions are also known as "Type 6 Procedures." 49 PATIENT DAY: Is the unit of measure of an account having lodging facilities provided and services rendered to one inpatient. WEEKLY A/R CROSS REFERENCE ACCOUNTS WITH NO CURRENT ACTIVITY: The unit of measure for the Weekly A/R Cross-Reference Report is each account appearing on the report that has had no activity in the current month, i.e., since last Preliminary Closing. EXCESS VENDORS: A record on the Accounts Payable Master File. Each occurrence of record represents one vendor for one hospital. The number of excess vendors is arrived at by having the application count the number of vendor records for a hospital, and subtracting 1000 from this count of records. Any positive result is accumulated by hospital and represents excess vendors. EXCESS VOUCHERS: Basically, over 90 days from input date to pay date. For each Voucher record, the application adds 90 days to the date the voucher was first placed on file and subtracts the result from the date of the run. A positive result represents an excess voucher for a hospital. EXCESS A/P GENERATED CHECKS: The number of checks printed for a hospital in a calendar month is counted by the Accounts Payable application. At the end of every calendar month, 500 is subtracted from this hospital count and any positive result is excess checks. EXCESS INVENTORY REQUESTS: Each hospital is entitled to four of each type of Inventory. When a user makes the fifth or subsequent request within any calendar year, they will be considered excess and be billed accordingly. 50 Union Labor Hospital Association (GENERAL HOSPITAL) Eureka, California Insured Mortgage Note (Series A) $6,600,000 San Francisco, California December 8, 1976 Union Labor Hospital Association, a California non-profit corporation doing business under the name GENERAL HOSPITAL (the "Hospital"), for value received, hereby promises to pay to BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION (the "Bank"), or order, on or before December 1, 2002, in accordance with the provisions hereof, at such place as the holder hereof may from time to time specify, the lesser of $6,600,000 or the aggregate amount of advances made by the Bank, as indicated on Schedule I hereto, as part of its payment of the purchase price for the Series A Notes pursuant to that certain Note Purchase Agreement (the "Note Purchase Agreement") by and between the Hospital and the Bank dated December 8, 1976 (the "principal amount"), in such coin or currency of the United States of America as at the time of payment shall be legal tender for public and private debts, and to pay from and after the date hereof interest on the unpaid balance of the principal amount semi-annually on the first days of June and December (the "Interest Payment Dates") in such coin or currency at the rate of nine and one-half percent (9-1/23) per annum. 51 or the first Interest Payment Date following the payment in full by the Hospital of the Series B notes issued pursuant to the Note Purchase Agreement (the "First Principal Payment Date"), and on each Interest Payment Date thereafter, the Hospital shall make equal semi-annual principal payments in an amount equal to two and one-half percent (2-1/2%) of the initial principal amount of the Series A Notes until the earlier of December 1, 2002, or the Interest Payment Date on which the entire principal amount shall have been paid. Optional prepayments of principal and payments of prepayment premiums, if any may be made on the dates and in the amounts provided in Section 2 hereof. This is one of a series of Insured Mortgage Notes (Series A) executed by the Hospital to the Bank in the aggregate principal amount of up to $6,600,000. All of such notes shall be payable and secured pari passu and are herein collectively referred to as the "Note" or "Notes". All optional payments required or permitted hereunder are expressed in the aggregate for all of the Notes and shall be applied pro rata to the Notes in accordance with their respective principal amounts (except where Section 2.4 of this Note may provide otherwise). 1. Security. Payment of this Note is (i) secured by a Deed of Trust of even date herewith (the "Deed of Trust") affecting the Hospital's interest in certain real and personal property located in Humboldt County, California, and (ii) insured under the California Health Facility Construction Loan Insurance Law. 2 52 2. Payment of principal. 2.1 Optional Prepayment Through Income or Gifts. The Hospital may on any Interest Payment Date after the First Principal Payment Date, and upon notice as provided in Section 2.5 hereof, prepay without premium a portion of the principal amount of the Series A Notes: provided, however, that no such pre-payment may be made unless (a) the aggregate of any prepayment of principal of the Series A Notes under this Section 2.1 shall be in an amount greater than $25,000 but not in any one year greater than five percent (5%) of the aggregate principal of the Series A Notes, (b) the aggregate prepayments of principal on the Series A Notes under this Section 2.1 shall not at any time exceed the amount of $3,000,000 and (c) no such prepayment of principal under this Section 2.1 may be made directly or indirectly from, or in anticipation of the use of, borrowed funds if such borrowing may be effected for a similar term at a lower rate of interest. In addition, prior to December 1, 1986, the Hospital may prepay all or a portion of the principal amount of the Series A Notes in excess of that permitted in clause (a) above if the conditions set forth in clauses (b) and (c) above have been complied with and upon the payment of a premium as follows:
If prepayment is made during Prepayment premium shall 12-month period ending be the following percentage of principal amount prepaid: ---------------------------- ---------------------------- in the year: 1977 9.5 1978 9.12 1979 8.74
3 53
If prepayment is made during Prepayment premium shall be 12-month period ending the following percentage of in the year principal amount prepaid -------------------------- --------------------------- 1980 8.36 1981 7.98 1982 7.6 1983 7.22 1984 6.84 1985 6.46 1986 6.08
The foregoing right of the Hospital under this Section 2.1 to make prepayments of the principal amount of the Notes shall not be cumulative, and any such permitted prepayment upon a particular date which is not exercised by the Hospital upon such date shall thereupon cease and lapse and be of no further force and effect. 2.2 Optional Prepayment From Any Source. The Hospital may, on any Interest Payment Date on or after December 1, 1986, upon notice as provided in Section 2.5 hereof, prepay the entire principal amount of the Series A Notes remaining unpaid, or any portion thereof, if in addition the Hospital pays a prepayment premium as follows: 4 54
If prepayment is made during Prepayment premium shall be 12-month period ending the following percentage of principal amount prepaid: - ---------------------------- --------------------------- in the year: 1985 6.08 1987 5.7 1988 5.32 1989 4.94 1990 4.56 1991 4.18 1992 3.8 1993 3.42 1994 3.04 1995 2.66 1996 2.28 1997 1.9 1998 1.52 1999 1.14 2000 .76 2001 .38 2002 .00
The premium provided for in this Section 2.2 shall not apply to any prepayment which qualifies for prepayment without premium under Section 2.1. 5 55 provide any new financing, in whatever term contemplated by the Hospital in conjunction with a request made pursuant to this Section 2.4. The Hospital further agrees that it will not undertake any such financing, with any other parties, without first giving such consenting Noteholders, in proportion to their respective holdings of Series A Notes, the opportunity, after having 30 days advance written notice, to provide such financing on the same terms as may be available from any other party. 2.5 Notice of Prepayment. Written notice of each intended prepayment shall be given by the Hospital to the holder of this Note not less than thirty (30) days in the case of a prepayment under Sections 2.1, 2.2 or 2.4 hereof and not less than sixty (60) days in the case of a prepayment under Section 2.3 hereof prior to the date fixed for prepayment, specifying such date, the principal amount of the Note to be prepaid on such date and the premium if any, applicable to such prepayment. 2.6 Maturity of Prepayments. In the event the Hospital gives written notice of its intention to make an optional prepayment hereunder, the principal amount to be prepaid shall become due and payable on the date fixed for prepayment together with any required premium and accrued interest. 2.7 Application of Optional Prepayments. All partial prepayments of this Note, whether with 7 56 or without premium, shall be applied in discharge of the installments of principal (including the maturity payment) coming due hereunder in the inverse order of the maturity of such installments of principal and shall not reduce any of the mandatory payments. 3. Miscellaneous. This Note shall be construed in accordance with and governed by the laws of the State of California. The captions of the paragraphs of this Note are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Any notice specified herein shall be made in accordance with the Deed of Trust by which these Notes are secured, under and pursuant to the Note Purchase Agreement, and shall be deemed to have been given upon the earlier of the receipt thereof or five (5) business days following the sending thereof. If any Event of Default, as defined in the Note Purchase Agreement, shall occur, the entire unpaid principal amount of this Note, together with accrued interest and prepayment premium, may, without notice, at the option of the holder hereof be declared immediately due and payable. Notwithstanding any provision herein or in the Note Purchase Agreement or the Deed of Trust, the total liability for payment hereunder in the nature of interest shall not exceed the limits imposed by the usury laws of the State of California 8 57 attorney be employed or expenses be incurred to compel payment of this Note or any portion of the indebtedness evidenced hereby, the prevailing party shall be entitled to its expenses and reasonable attorney's fees. The Note is issued under and pursuant to the terms and conditions of the Note Purchase Agreement. Said Note Purchase Agreement and the Deed of Trust contain provisions for the acceleration of the maturity hereof upon the happening of certain stated events as set forth therein. The rights of the holder hereof in the event of a default are more particularly set forth in the Note Purchase Agreement and the Deed of Trust. Any term specially defined in the Note Purchase Agreement shall have the same meaning herein. Each advance made by the holder hereof as part of the payment of the purchase price hereof shall be recorded on Schedule A hereto by the holder hereof, and, if requested upon presentation therefor, acknowledged by the Hospital. The undersigned, and any endorsers or guarantors hereof, jointly and severally waive diligence, presentment, protest and demand and also notice of protest, demand, dishonor and nonpayment of this Note, and expressly agree that this Note, or any payment hereunder, may be extended from time to time by the holder hereof, and consent to the acceptance by the holder hereof of further security or the release by the holder hereof of any security for this Note, all without in any way affecting the liability of the undersigned and any endorsers or guarantors hereof. No extension 9 58 of time for the payment of this Note, or an installment hereof, made by agreement by the holder hereof with any person now or hereafter liable for the payment of this Note shall affect the original liability under this Note of the undersigned, even if the undersigned is not a party to such agreement. IN WITNESS WHEREOF, the undersigned have set their hands and affixed the seal of the Hospital this 8th day of December, 1976. UNION LABOR HOSPITAL ASSOCIATION By --------------------------------- [SEAL] ATTEST: - ---------------------------------------- Secretary 10 59 ADDENDUM TO ASSIGNMENT The following is hereby added to and made a part of the Assignment of Union Labor Hospital Association's rights and obligations described in the Transfer Agreement dated October 31, 1975, and Amendments thereto, between the Association and the County of Humboldt. 1. The Assignment is conditioned upon: a. The continued operation of The General Hospital facility by Brim Hospitals, Inc., in compliance with all applicable State and Federal laws and regulations concerning the quality of health care. b. Any subsequent assignments of the Transfer Agreement being subject to the written approval of the Board of Supervisors. c. The County receiving and reviewing proof of insurance from Union Labor Hospital Association with limits of Five Million Dollars $5,000,000.00 regarding exposure arising from its indemnification of the County. 2. The Assignment shall be in full force and effect for so long as Brim Hospitals, Inc., is operating The General Hospital, as lessee or owner, and shall terminate and be of 60 no force or effect at such time as Brim Hospitals, Inc. discontinues operation of The General Hospital. Dated: UNION LABOR HOSPITAL ASSOCIATION By: -------------------------------- Dated: BRIM HOSPITALS, INC. By: -------------------------------- Dated: COUNTY OF HUMBOLDT By: -------------------------------- Chairman of the Board of Supervisors of the County of Humboldt, State of California (SEAL) ATTEST: - ------------------------------------ County Clerk and ex officio Clerk of the Board of Supervisors of the County of Humboldt, State of California By: --------------------------------- Deputy Clerk APPROVED AS TO FORM: - ------------------------------------ Robert D. Curiel County Counsel 61 FIRST AMENDMENT TO LEASE AGREEMENT BETWEEN UNION LABOR HOSPITAL ASSOCIATION, INC., AND BRIM HOSPITALS, INC. Union Labor Hospital Association, a California Public Benefit Corporation, and Brim Hospitals, Inc., an Oregon Corporation, hereby make a first amendment to that Lease Agreement dated December 16, 1985, entered into by the parties hereto, in the following particulars: It is hereby agreed between the parties as follows: 1. There is added to page 3, Article 6, after the first sentence of said paragraph, ending with "office buildings" the following language: "Lessee understands and fully agrees that it is expressly prohibited from operating at the premises a skilled nursing facility, extended care facility, immediate care facility, or long-term care facility." 2. There is added to page 12, Article 16.04, the following language: "In the event that Lessee or any other party shall make principal payment, in any amount, on the promissory note given by Lessor to Bank of America dated January 26, 1979, which payment reduces the amount of 62 Lessor's quarterly payments due the Bank of America then Lessee's payment under this lease shall be reduced correspondingly." Dated: 12/16/85 UNION LABOR HOSPITAL ASSOCIATION By: /s/ Ted W. Loring, M.D. -------------------------------- Dated: 12/16/85 BRIM HOSPITALS, INC. By: /s/ K. David McAllister -------------------------------- 63 SECOND AMENDMENT TO LEASE AGREEMENT BETWEEN UNION LABOR HOSPITAL ASSOCIATION, INC., AND BRIM HOSPITALS, INC. Union Labor Hospital Association, a California Public Benefit Corporation, and Brim Hospitals, Inc., an Oregon Corporation, hereby make a second amendment to that Lease Agreement dated December 16, 1985, entered into by the parties hereto, as follows: The parties agree that the Lease Agreement is and shall be subject to the Regulatory Agreement executed by and between Union Labor Hospital Association, (dba General Hospital) and the Director of the Office of Statewide Health Planning for the State of California, dated as December 8, 1976, and recorded December 8, 1976, in Book 1381 of Official Records, page 606, under Recorder's File No. 23780, a copy of which is attached hereto and incorporated herein (hereafter Regulatory Agreement); further, should any conflict arise or exist between the terms and conditions of the Lease Agreement and the Regulatory Agreement the terms and conditions of the Regulatory Agreement shall apply and prevail . Except as specifically set forth herein and as in the first amendment to the lease, the lease shall remain in full force and effect as originally agreed. Dated: 9/16/86 UNION LABOR HOSPITAL ASSOCIATION By: /s/ Ted W. Loring, M.D. -------------------------------- Dated: 9/9/86 BRIM HOSPITALS, INC. By: /s/ John R. Miller -------------------------------- JRM:Mrm 9/8/86 64 THIRD AMENDMENT TO LEASE AGREEMENT BETWEEN UNION LABOR HOSPITAL ASSOCIATION, INC. AND BRIM HOSPITALS, INC. Union Labor Hospital Association, a California Public Benefit Corporation, and Brim Hospitals, Inc., an Oregon Corporation, hereby make a Third Amendment to that Lease Agreement dated December 16, 1985, as amended (the Lease). This Amendment shall be in replacement and clarification of certain portions of the Lease as follows: 1. Section 3.01. Attached to this Amendment and marked Exhibit C is a revised Exhibit C which replaces in full Exhibit C as attached to the Lease. Rents shall be due 30 days before the dates shown on Exhibit C. The parties acknowledge that Lessee has paid rent pursuant to the attached Exhibit C through May 31, 1989, which includes the 30-day advance payment of the amount due June 15, 1989, on the C Note. 2. Article 19. Article 19 of the Lease is clarified to resolve a patent ambiguity with respect to the term "outstanding long-term indebtedness". This term has always meant the amount equal to the unpaid rent as reflected on Exhibit C as reduced under other provisions of the Lease at the date of the closing of the purchase resulting from the exercise of the option. 1 65 3. Article 16.03. Article 16.03 of the Lease is clarified to resolve a patent ambiguity with respect to the application of net proceeds being applied to debt. The understanding of the parties has always been the unpaid rent as reflected on Exhibit C shall be reduced by any amounts paid pursuant to Section 16.03 of the Lease (i) to the Lessor, (ii) as a payment on the promissory note given by Lessor to Bank of America dated January 26, 1979, or (iii) as a payment on the promissory note dated December 8, 1976, given by Lessor to Bank of America. In addition, for this purpose, the unpaid rent shall be reduced by any amounts received by Lessor or paid on either of the promissory notes described immediately above as either insurance proceeds or condemnation proceeds not used for repair or replacement of the damaged or condemned property or amounts paid in lieu thereof as a result of an event described in Section 7, 8 or 9 of the Lease. 4. Article 19. Article 19 of the Lease is amended by adding the following sentence to the end of Article 19 as follows: "Lessor agrees that, at closing, Lessor will transfer title to the leased premises to Lessee free and clear of all liens or encumbrances except those created by Lessee." 5. General. Lessee acknowledges that the option to purchase the leased premises under the terms and conditions originally agreed as clarified by this Third Amendment to the Lease was essential to its leasing the premises. Lessor agreed to the 2 66 original option to purchase, as clarified, because Lessor believes its primary responsibility was to provide quality health care to the residents of Eureka and its surrounding area; in order to serve the health care needs of the community, it was necessary to enter into the Lease with Lessee, including the provision providing the option to purchase. By so having agreed, Lessor has assured that General Hospital has been operating and providing health care to the community since January 1, 1986. Dated as of June 20, 1989. LESSOR: UNION LABOR HOSPITAL ASSOCIATION By: /s/ Ted W. Loring, M.D. -------------------------------- Ted W. Loring, M.D. LESSEE: BRIM HOSPITALS, INC. By: /s/ John R. Miller -------------------------------- President -------------------------------- 3 67 EXHIBIT C LEASE PAYMENT SCHEDULE
Year A Note C Note 1986 May 1 $433,975.00 $888,155.27 payable Nov. 1 426,138.00 monthly; 84 monthly installments of 1987 May 1 $418,300.00 $10,573.28 plus Nov. 1 410,462.00 interest of the Bank America's Reference 1988 May 1 $402,625.00 Rate plus 1/2% on the Nov. 1 394,787.00 outstanding balance, with each payment being 1989 May 1 $386,949.00 made on the 15th day of Nov. 1 379,111.00 each month beginning January 15, 1986. 1990 May 1 $371,273.00 Nov. 1 363,435.00 1991 May 1 $355,597.00 Nov. 1 347,759.00 1992 May 1 $339,921.00 Nov. 1 332,083.00 1993 May 1 $324,245.00 Nov. 1 316,407.00 1994 May 1 $308,569.00 Nov. 1 300,731.00 1995 May 1 $292,893.00 Nov. 1 285,055.00 1996 May 1 $277,217.00 Nov. 1 269,379.00 1997 May 1 $261,541.00 Nov. 1 253,703.00 1998 May 1 $245,865.00 Nov. 1 238,027.00 1999 May 1 $230,189.00 Nov. 1 222,351.00 2000 May 1 $214,513.00 Nov. 1 206,675.00
68 FOURTH AMENDMENT TO LEASE AGREEMENT BETWEEN UNION LABOR HOSPITAL ASSOCIATION, INC., AND BRIM HOSPITALS, INC. Union Labor Hospital Association, a California Public Benefit Corporation (hereinafter Lessor), and Brim Hospitals, Inc., an Oregon Corporation (hereinafter Lessee) hereby make a fourth amendment to that Lease Agreement dated December 16, 1985, entered into by the parties hereto, as follows: RECITALS A. Lessor and lessee have entered into a Lease Agreement dated December 16, 1985. The Lease Agreement was amended by a First Amendment to Lease Agreement dated December 16, 1985, a Second Amendment to Lease Agreement dated September 9, 1985 and September 16, 1985, an Agreement Re: Release of Property from Lease dated May 21, 1987, and a Third Amendment to Lease Agreement dated June 20, 1989. These are hereafter referred to as the "Lease Agreement". B. Lessee and The Hillhaven Corporation, a Tennessee Corporation (hereinafter referred to as Hillhaven), have entered into a Purchase and Sale Agreement dated as of March 31, 1988, pursuant to which Hillhaven may condition or otherwise control the modification of the Lease Agreement. In consideration of the mutual covenants contained in the agreement, the parties agree as follows: 69 1. Lessor shall pay to lessee the sum of $400,000.00 (Four Hundred Thousand Dollars). 2. In consideration therefor, lessor shall (a) obtain a release from Hillhaven of any interest or control it may have retained in the Lease Agreement, and (b) Article 16.03 at page 12 of the Lease Agreement and the reference to Article 16.03 at page 2 of the Third Amendment to Lease Agreement shall have no force or effect and shall be stricken from the Lease Agreement in its entirety. 3. No amendment, modification or alteration of the terms hereof shall be binding unless the same be in writing, dated subsequent to the date hereof and duly executed by the parties hereto. 4. In all other respects, lessor and lessee hereby ratify and confirm the provisions of the Lease. This modification of the Lease Agreement has been executed by the parties on the date and year first above written. Lessor: UNION LABOR HOSPITAL ASSOCIATION By: /s/ Charles M. Thomas, Jr. -------------------------------- Charles M. Thomas, Jr. Board of Directors ATTEST: /s/ Marla D. Walters - ------------------------------------ 70 Lessee: BRIM HOSPITALS, INC. Dated: 6/18/92 By: /s/ John F. Miller -------------------------------- ATTEST: /s/ K. David McAllister - ------------------------------------ 71 FIFTH AGREEMENT TO LEASE BETWEEN UNION LABOR HOSPITAL ASSOCIATION AND BRIM HOSPITALS, INC. UNION LABOR HOSPITAL ASSOCIATION, a California Public Benefit Corporation, (hereinafter "Lessor") and Brim Hospitals, Inc., an Oregon Corporation (hereinafter "Lessee") make a Fifth Amendment to that Lease Agreement dated December 16, 1985, and entered into by the parties hereto, as follows: RECITALS Lessee finances various equipment at the subject premises as well as at other hospitals through MetLife Capital Corporation. Metlife Capital Corporation requires that the landlord agree, subordinate, and waive any claims, demands, or rights that Lessor may have or acquire with respect to equipment so financed. Lessee has requested that Lessor sign the "Landlord's Waiver and Agreement", a copy of which is attached hereto as Exhibit "A". In consideration of the mutual covenants contained in the Agreement, the parties agree as follows: 1. Lessor will execute the Landlord's Agreement and Waiver; 2. Lessee agrees that, by Lessor's signing, Lessor has not approved equipment added to the Hospital which cannot be removed without damaging the Hospital's physical facilities, as set forth in Article 17 of the Lease Agreement. In order for Lessee to have any rights to payment for equipment installed pursuant to paragraph 2.02 of the Lease 72 Agreement, Lessee agrees it must clearly and separately follow the requirements of Article 17 of the Lease. 3. Lessor may revoke its consent to Exhibit "A" on 15 days' written notice. Any such revocation shall be as to equipment acquired after the effective date of revocation. Lessor: UNION LABOR HOSPITAL ASSOCIATION Dated: 6/23/94 By: /s/ Charles M. Thomas, Jr. -------------------------------- Lessor BRIM HOSPITALS, INC. Dated: 6/30/94 By: /s/ John F. Miller -------------------------------- Attest: /s/ Susan A. Hunt - ------------------------------------ 73 When recorded please return to: DIW Transaction No. 2011394 MetLife Capital Corporation C-97550 Bellevue, WA 98009 Lessee/Borrower Brim Hospitals, Inc. dba The General Hospital ------------------------------------------------- Premises 2200 Harrison Avenue ------------------------------------------------- Eureka, CA ------------------------------------------------- LANDLORD'S AGREEMENT AND WAIVER Lessee/Borrower has applied to MetLife Capital Corporation ("MetLife") for financing of the following described equipment: Various new and used medical equipment together with an accessions, attachments, and additions thereto and replacements thereof. ("Equipment"). Lessee/Borrower intends to locate the Equipment on the Premises legally described as follows: MetLife is willing to enter into said transaction only if Landlord subordinates and waives as to MetLife any claims, demands or rights Landlord may have or hereafter acquire with respect to the Equipment. 1. Subject to the terms hereof, Landlord by this agreement does hereby waive and relinquish to MetLife, its successors and assigns, all rights, claims and demands of every kind against the Equipment now located or to be located on the above Premises, including but not limited to the right of foreclosure, levy, execution, sale and distraint for unpaid rent or other rights arising under real property law or by contract which Landlord now has or may hereafter acquire on any of the Equipment presently or hereafter financed or leased by MetLife. 2. Landlord agrees that the Equipment shall at all times be considered to be personal property and shall not constitute a fixture or become part of the Premises. Landlord agrees that MetLife may remove the Equipment from the Premises at all reasonable times, and Landlord will give MetLife not less than sixty (60) days written notice if MetLife shall be required to remove the Equipment; provided however, that MetLife will either repair any damage caused by such removal or reimburse Landlord for the reasonable cost thereof 74 3. This Agreement and Waiver shall be binding upon successors, transferees and assigns of Landlord and shall inure to the benefit of the successors and assigns of MetLife. Landlord will provide MetLife with a legal description of the Premises upon request. 4. This Agreement and Waiver may be recorded at any time by MetLife, is successors and assigns. IN WITNESS WHEREOF, the undersigned Landlord has executed this Agreement and Waiver this 27th day of June, 1994 [CORPORATE SEAL] LANDLORD: UNION LABOR HOSPITAL ASSN. /s/ Charles M. Thomas -------------------------------------- Attest: By: Charles M. Thomas - ----------------------------- ----------------------------------- Its Treasurer ----------------------------------- ACKNOWLEDGMENT -------------- STATE OF CALIFORNIA COUNTY OF HUMBOLDT On this 27th day of June, 1994, before me, a Notary Public, personally appared Charles M. Thomas, and ________________________, to me known to be the Treasurer, ULHA and _____________________, respectively, of __________, who executed the foregoing instrument and acknowledged the said instrument was the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned. /s/ Mark D. Walters ------------------------------------ NOTARY PUBLIC in and for the State of California, residing at Arcata My commission expires May 2, 1997. [NOTARIAL SEAL] MARLA D. WALTERS COMM 3994024 NOTARY PUBLIC HUMBOLDT COUNTY, CALIFORNIA MY COMMISSION EXPIRES MAY 2, 1997 75 documents necessary to establish this release, in exchange for the following. ULHA will construct and own a building designed for and used for purposes of housing the equipment, which will be located on the parcel of property contained in Exhibit "B", and in which building Partnership shall house and operate the equipment. Further, ULHA and Partnership must execute with Brim an agreement whereby Brim shall retain the right of approval and consent, which approval and consent shall not be unreasonably withheld, in regards to the following aspects of the building and the services provided by Partnership on the property described in Exhibit "B": 1. The design, appearance,, and quality of the construction of the building; 2. Any and all signing visible from the outside of the building; 3. What individuals and/or businesses shall occupy the building; 4. What services shall be provided in the building, including, but not limited to, the right to reject any business or service in competition with The General Hospital. IT IS FURTHER AGREED between Brim and ULHA that, in the event that the building is completed and the Partnership no longer occupies said building, Brim may lease the building 76 from ULHA under the same terms and conditions of the lease between ULHA and the Partnership. In addition, in the event that Brim exercises its option to purchase the General Hospital property, the parties hereto agree that said purchase shall include the property described in Exhibit "B" hereto, said return conditioned upon Brim purchasing the building erected to house the equipment; the purchase price shall be the sum of Two Hundred Thousand Dollars $200,000.00). Unless otherwise agreed by the parties, the purchase price shall be paid in cash at the time of the closing of the purchase from Brim of The General Hospital property as described in Exhibit A. The lease between Brim and ULHA relative to The General Hospital property shall remain in full force and effect as originally executed except as specifically set forth in this agreement. This agreement represents the entirety of the agreement between the parties with respect to its subject matter. This agreement can be amended only by written agreement signed by the parties . The invalidity of any provision of this agreement shall not affect the validity and enforceability of the remainder of the agreement. Should any litigation be commenced among the parties hereto or their personal representatives concerning any provision of this agreement or the rights and duties of any person in relation thereto, the party or parties prevailing in such litigation shall he entitled, in addition to such 77 other relief as may be granted, to a reasonable sum as and for their or his attorney's fees in such litigation which shall be determined by the court in such litigation or in a separate action brought for that purpose. This agreement will be governed by and construed in accordance with the laws of the State of California, and venue for any litigation shall he Humboldt County, California. This Agreement shall be of so force or effect if construction on the project contemplated by this Agreement is cot commenced by January 1, 1988, unless extended by written agreement of the parties hereto. Dated: 5/21/87 UNION LABOR HOSPITAL ASSOCIATION ---------------- By: ------------------------------------ Dated: 5/21/87 BRIM HOSPITALS, INC. ---------------- By:/s/ John L. Miller ------------------------------------ 78 GUARANTY OF WORKING CAPITAL --------------------------- For good and valuable consideration, receipt of which is hereby acknowledged, and to induce Union Labor Hospital Association, a California Public Benefit Corporation (Landlord), to enter into the Lease (the "Lease") dated 12/16/85, with Brim Hospitals Inc., an Oregon corporation ("Tenant"), Brim & Associates, Inc., an Oregon corporation, and The Hillhaven Corporation, a Tennessee corporation, (individually and collectively referred to herein as "Guarantor"), do hereby agrees as follows: 1. Guarantor does hereby absolutely, irrevocably and unconditionally guarantee to make available from time to time to Tenant such sums of operating capital as may be needed by Tenant for the purpose of conducting Tenant's business operations in accordance with the terms of the Lease up to a maximum sum total of Three Million Dollars ($3,000,000.00). Said sum shall be made available to Tenant in the form of intercompany loans evidenced by a proper journal entry on the books and records of Guarantor. 2. Within ninety (90) days of each anniversary of the Lease, Guarantor shall provide Landlord with a schedule which discloses the amount of funds made available to the date thereof to Tenant pursuant to this Agreement. Said schedule shall indicate the date and amount of each loan and shall be acknowledged in writing to be accurate by the Treasurer or Chief Financial Officer of Hillhaven. Notwithstanding the foregoing, Guarantor's failure to provide said schedule shall not be deemed to be a breach of its obligations hereunder until Guarantor is given 30 days notice of its failure to comply with said obligations. 3. If Guarantor fails to comply with the provisions of paragraph 1 above, and said failure causes Tenant to default in the performance of either its obligations under the Lease or its obligations to any third party incurred in connection with its obligations under the Lease, then Guarantor shall be deemed a guarantor of Tenant's obligations pursuant to the terms of the Lease and Landlord may proceed directly against Guarantor to enforce the provisions of the Lease in the event of Tenant's default under the terms thereof. 79 4. The obligations of Guarantor under this Guaranty are independent of the obligations of Tenant under the Lease and a separate action or actions may be brought and prosecuted against Guarantor for breach of its obligations hereunder whether or not an action is brought against Tenant or Tenant is joined in any such action or actions. 5. Guarantor waives all rights under Section 2845 of the California Civil Code. Landlord may, at its election, exercise any right or remedy it may have against Tenant or any security now or hereafter held by Landlord, including, without limitation, the right to foreclose on any security by Judicial or nonjudicial sale, without affecting or impairing in any way the liability of Guarantor hereunder except to the extent the obligations of Tenant under the Lease may thereby be paid or satisfied. Guarantor waives any defense arising out of the absence, impairment or loss of any right of reimbursement or subrogation or other right or remedy of Guarantor against Tenant or any such security, whether resulting from such election by Landlord or otherwise. Guarantor waives any setoff, defense or counterclaim which the Tenant or Guarantor may have or claim to have against Landlord. Guarantor waives all presentments, demands for performance, protests, notices of protest, notices of dishonor, notices of acceptance of this Guaranty. Guarantor does not waive notices of nonperformance, notices of default or diligence. 6. Guarantor authorizes Landlord and Tenant to amend or modify any provision of the Lease or extend or renew the term of the Lease, provided, however, that Landlord shall give Guarantor notice thereof. Guarantor further authorizes Landlord to settle or compromise any or all of the obligations of Tenant under the Lease, provided, however. that Landlord shall give Guarantor notice thereof. Guarantor shall be and remain bound under this Guaranty notwithstanding Landlord's taking any of the foregoing actions and it waives the provisions of Civil Code Section 2819. 80 7. Guarantor assumes the responsibility for being and keeping itself informed of the financial condition of Tenant and of all other circumstances bearing upon the risk of nonperformance of the Lease which diligent inquiry would reveal and agrees that except as otherwise provided herein, Landlord has no duty to advise Guarantor of information known to Landlord regarding such condition or any such circumstances. 8. If any provision of this Guaranty is held to be invalid or unenforceable, the validity and enforceability of the other provisions of this Guaranty shall not be affected. Landlord shall have the right, without any consent from but with notice to Guarantor, to assign this Guaranty in whole or in part. This Guaranty shall bind and inure to the benefit of Landlord and Guarantor and their respective successors and assigns. 9. All notices and other communications required or permitted under this Guaranty shall be effective and properly given only if made in writing and either hand delivered or mailed by first class mail, postage prepaid, to the party intended at the address set forth below, or at such other address as may be designated by written notice to the other party. All notices, demands or requests to Landlord shall be given at 123 "F" Street, Eureka, California 95501. All notices, demands or requests to Lessee shall be given at 177 N. E. 102nd Avenue, Portland, Oregon 97220. If any such notice or other communication hereunder is mailed, such notice shall be effective within three (3) days of the date such notice is deposited in the mail. If any such notice or other communication hereunder is hand delivered, such notice shall be effective on the date of hand delivery. 10. The parties agree that the losing party shall pay all costs and expenses, including reasonable attorneys' fees, which are incurred by the prevailing party in connection with any litigation brought to enforce or interpret this Guaranty. 11. This Guaranty shall be governed by and construed in accordance with the laws of the State of California. Guarantor consents to jurisdiction and service of process within California for any action arising under this Guaranty. 12. All obligations contained herein shall be joint and several obligations of each of the undersigned. 81 Executed this 17th day of January, 1986. LANDLORD: UNION LABOR HOSPITAL ASSOCIATION BY:/s/ -------------------------------- ITS: President ------------------------------- TENANT: BRIM HOSPITALS, INC. An Oregon Corporation BY:/s/ K. David McAlister -------------------------------- ITS: President ------------------------------- GUARANTOR: BRIM & ASSOCIATES, INC. An Oregon Corporation BY:/s/ -------------------------------- ITS: President ------------------------------- GUARANTOR: THE HILLHAVEN CORPORATION A Tennessee Corporation BY:/s/ -------------------------------- ITS: Vice Pres. ------------------------------- EX-10.18 14 LEASE AGREEMENT DATED 12-1-92 1 EXHIBIT 10.18 PALO VERDE HOSPITAL LEASE AGREEMENT Palo Verde Hospital Association Landlord Brim Hospitals, Inc. Tenant Dated December 1, 1992 2 TABLE OF CONTENTS 1. Lease of Property..................................................1 1.1 Real Property................................................1 1.2 Fixtures and Equipment.......................................1 1.3 Personal Property............................................1 1.4 Licenses.....................................................2 2. Term...............................................................2 2.1 Initial Term.................................................2 2.2 Renewal Term.................................................2 3. Rent...............................................................2 3.1 Amount.......................................................2 3.2 Payment......................................................3 3.3 Net Lease....................................................3 4. Working Capital....................................................3 4.1 Purchase.....................................................3 4.2 Representations Concerning Working Capital...................3 5. Liabilities........................................................4 5.1 Successor Liabilities........................................4 5.2 Current Liabilities..........................................4 5.3 Assumed Contracts............................................4 5.4 Excluded Liabilities.........................................4 5.5 Payment of Excluded Liabilities..............................5 6. Purchase Price of Working Capital..................................5 6.1 Price........................................................5 6.2 Application of Funds.........................................6 7. Employees..........................................................6 8. Option to Purchase.................................................6 8.1 Notice.......................................................6 8.2 Purchase Price...............................................6 8.3 Closing......................................................7 9. Right of First Refusal to Purchase Hospital........................8 9.1 Notice.......................................................8 9.2 Exception....................................................8 10. Option to Purchase by Landlord.....................................8 10.1 Condition Precedent..........................................8 10.2 Notice.......................................................9 10.3 Purchase Price...............................................9 10.4 Termination..................................................9 11. Representations and Warranties of Landlord.........................9 i 3 11.1 Organization.......................................... 9 11.2 Authority............................................. 9 11.3 Effect of Agreement................................... 9 11.4 Warranty of Title.....................................10 11.5 Financial Statements..................................10 11.7 Accounts Receivable...................................10 11.8 Employee Benefit Plans................................10 11.9 Litigation............................................11 11.10 Transactions with Certain Persons.....................11 11.11 Consents..............................................11 11.12 Compliance with Laws..................................11 11.13 Government Approvals..................................11 11.14 Labor Matters.........................................12 11.15 Finder's Fee..........................................12 11.16 Zoning................................................12 11.17 No Contracts..........................................12 11.18 Hill-Burton Liability.................................12 11.19 Environmental Matters.................................12 11.20 Bank Accounts.........................................14 12. Representations and Warranties of Tenant.....................14 12.1 Organization..........................................14 12.2 Authority.............................................14 12.3 Effect of Agreement...................................14 12.4 Litigation............................................14 12.5 Licenses..............................................15 12.6 Inspection............................................15 12.7 Accuracy..............................................15 13 Landlord's Covenants.........................................15 13.1 Quiet Enjoyment.......................................15 13.2 First Mortgage........................................15 13.3 Restrictive Covenants.................................15 13.4 Encumbrances..........................................15 13.5 Fund Raising..........................................15 14 Tenant's Covenants...........................................15 14.1 Use of Hospital.......................................15 14.2 Assumed Contracts.....................................16 14.3 Hospital Support Agreement............................16 14.4 Financial Statement...................................16 14.5 Education.............................................16 14.6 Medical Office Building...............................16 14.7 Expansion.............................................16 14.8 Inspection............................................16 15 Services and Utilities.......................................16 16 Maintenance and Repair.......................................16 16.1 Routine Maintenance...................................16 16.2 Capital Improvements..................................17 16.3 Tenant Purchases......................................17 ii 4 17 Development Funds .............................................. 17 17.1 Use of Funds ........................................... 18 17.2 Deposit and Use of Funds ............................... 18 17.3 Ownership and Inclusion in Lease ....................... 18 18 Profits Participation .......................................... 18 18.1 Percentage ............................................. 19 18.2 Payment ................................................ 19 18.3 Net Income ............................................. 19 18.4 Termination ............................................ 19 19 Liens ........................................................ 20 20 Taxes and Assessments .......................................... 20 20.1 Real Property .......................................... 20 20.2 Personal Property ...................................... 20 20.3 Assessments ........................................... 20 20.4 Objection to Validity or Amount of Tax ................. 20 20.5 Expiration or Termination .............................. 20 21 Insurance ...................................................... 20 21.1 Liability Insurance .................................... 20 21.2 Property Insurance ..................................... 21 21.3 Professional Liability Insurance ....................... 21 21.4 Waiver of Subrogation .................................. 21 21.5 Insurance Policies ..................................... 21 22 Damage or Destruction .......................................... 21 22.1 Termination ............................................ 21 22.2 Reconstruction ......................................... 21 23 Condemnation ................................................... 22 23.1 Termination ............................................ 22 23.2 Rights to Award ........................................ 22 24 Assignment and Sublease ....................................... 22 25 Default by Tenant .............................................. 22 25.1 Nonpayment ............................................. 22 25.2 Noncompliance .......................................... 23 26 Landlord Remedies on Default by Tenant ......................... 23 27 Default by Landlord ............................................ 23 27.1 Payment ................................................ 23 27.2 Noncompliance .......................................... 23 28 Tenant's Remedies .............................................. 23 29 Termination for Impairment ..................................... 24 30 Surrender at Expiration ........................................ 24 iii 5 31 Consequences of Expiration or Termination ....................... 24 31.1 Working Capital ......................................... 24 31.2 Capital Improvements .................................... 24 31.3 Assumed Contracts ....................................... 25 31.4 Licenses ................................................ 25 32 Adverse Changes ................................................. 25 33 Indemnity ....................................................... 25 33.1 Landlord's Obligations .................................. 25 33.2 Tenant's Obligation ..................................... 26 34 Memorandum of Lease ............................................. 26 35 Conditions to Tenant's Obligations .............................. 26 35.1 Licenses ................................................ 26 35.2 First Mortgage .......................................... 26 35.3 Hospital Support Agreement .............................. 26 35.4 Insurance ............................................... 26 35.5 Representations, Etc .................................... 27 35.6 Legal Opinion ........................................... 27 35.7 Title Insurance ......................................... 27 35.8 Environmental Audit ..................................... 27 36 Conditions to Landlord's Obligations ............................ 27 36.1 Licenses ................................................ 27 36.2 First Mortgage .......................................... 27 36.3 Hospital Support Agreement .............................. 27 36.4 Insurance ............................................... 27 36.5 Representations, Etc .................................... 28 36.6 Legal Opinion ........................................... 28 37 Arbitration ..................................................... 28 38 General Provisions .............................................. 28 38.1 Nonwaiver ............................................... 28 38.2 Expenses ................................................ 28 38.3 Notices ................................................. 28 38.4 Survival ................................................ 29 38.5 Successors and Assigns .................................. 29 38.6 Captions ................................................ 29 38.7 Governing Law ........................................... 29 38.8 Consents ................................................ 30 iv 6 PALO VERDE HOSPITAL LEASE AGREEMENT Between: Palo Verde Hospital Association, a California nonprofit corporation "Landlord" And: Brim Hospitals, Inc., an Oregon corporation "Tenant" Dated: December 1, 1992 BACKGROUND Landlord owns and operates the Palo Verde Hospital in Blythe, California. This Lease set forth the terms under which Tenant will lease the Hospital and purchase its working capital. AGREEMENT 1 Lease of Property. Landlord hereby leases to Tenant the following property: 1.1 REAL PROPERTY. The parcels of real property described on Schedule 1.1, together with all improvements on and all rights, privileges and easements appurtenant to the real property (the "Real Property"); 1.2 FIXTURES AND EQUIPMENT. All improvements, fixtures, equipment (including heating, ventilating and air conditioning equipment), machinery, apparatus, drapes, carpets, wall, window and floor coverings, vehicles, spare parts, computers, copiers, furniture and furnishings, wherever located, used or useful in connection with the operation of the Hospital, but excluding current assets to be purchased under Section 4.1; 1.3 PERSONAL PROPERTY. All personal property, tangible or intangible, owned by Landlord, wherever located, used or useful in connection with the operation of the Hospital, including all books and records of Landlord relating to the Hospital, medical records, patient lists and records, Medicare, Medi-Cal, and other third-party payor reimbursement records, plans, specifications, drawings, handbooks, warranties, deeds, operating manuals, employee records, equipment records, medical and administrative libraries, construction plans and specifications, computer software and files and other documents; the name "Palo Verde Hospital" and all derivations of such name; all trademarks and tradenames in which Landlord has an interest, and all of Landlord's rights in any and all health care services 7 and health care programs offered at or in connection with the operation of the Hospital; and 1.4 LICENSES. All intangible rights, relationships, licenses, accreditations, certificates of need, certificates of exemption and other authorizations or permits issued to Landlord in connection with the operation and going concern value of the Hospital, including, without limitation, those identified on Schedule 1.4. The property identified above and the business and operations conducted with the property is collectively referred to as the "Hospital." The term Hospital does not include working capital. 2 TERM. 2.1 INITIAL TERM. The initial term of this Lease will begin upon the later of January 1, 1993 or satisfaction or waiver of all of the conditions specified in SECTION 33 (the "Commencement Date") and will expire on December 31, 2002. Tenant will notify Landlord within 10 days after satisfaction or waiver of the conditions. 2.2 RENEWAL TERM. Tenant may renew this Lease for one additional term of ten (10) years, from January 1, 2003 through December 31, 2012. All terms of the Lease will remain the same during the renewal term. The option to renew may be exercised by written notice to Landlord given on or before January 1, 2002. The phrase "Lease Term" will mean the initial term and renewal term, if elected by Tenant, subject to earlier termination in accordance with the terms of this Lease. 3 RENT. 3.1 AMOUNT. Tenant will pay to Landlord as rent the sum of the amounts determined under Sections 3.1.1 and 3.1.2 below: 3.1.1 One hundred three thousand three hundred nineteen dollars ($103,319.00) per year, payable in advance. The first rent payment will be due on the Commencement Date. Subsequent rent payments will be due on the nineteenth (19th) day of each October commencing October 19, 1993. Tenant will receive a credit against the rent payment due October 19, 2001 equal to $283.07 ($103,319.00 divided by 365 days) times the number of days that the Commencement Date falls after October 1, 1992. This component of the rent is equal to the annual debt service on the Farmers Home Administration loan secured by the trust deed identified as item no. 4, Schedule B of the title report referenced in Section 11.4 (the "First Mortgage"), plus one dollar ($1.00). Rent for the last year of the Lease Term (that is, the rent due October 19, 2002) and upon expiration or 2 8 termination of the Lease Term will be prorated on the basis of the period Tenant occupies the Hospital. Tenant will also pay, as additional rent, $861.00 per month into the replacement reserve account maintained in connection with the First Mortgage (such payments being collectively referred to as the "Reserve Payments"). Tenant's obligation to pay the Reserve Payments will be suspended during any period that the reserve account is fully funded. 3.1.2 One thousand six hundred thirteen dollars ($1,613.00) per month on or before the first day of each month commencing January 1, 1993 to and including October 1, 1998, and one thousand six hundred eighty two dollars ($1,682.00) on or before November 1, 1998. This component of rent is equal to Landlord's debt service under the California Health Facilities Financing Authority Help Program Promissory Note dated October 25, 1991 in the original principal amount of $116,205 (the "Help Note"). If the expiration or termination of this Lease is other than on the last day of a calendar month, the rent payment made on the first day of the month during which the expiration or termination occurs will be prorated. 3.2 PAYMENT. Tenant will pay rent (less $1.00) directly to the holders of the First Mortgage and the Help Note. Alternatively, Tenant may require Landlord to enter into an escrow or similar arrangement to assure application of rent to the holders of the First Mortgage and the Help Note. 3.3 NET LEASE. This Lease is what is commonly called a "Net Lease." In addition to the rent specified above, Tenant will be responsible for payment of all taxes, utilities and insurance premiums which arise with respect to the Hospital during the Lease Term. 4 WORKING CAPITAL. 4.1 PURCHASE. In consideration of the price determined under Section 6, Landlord hereby sells, assigns and transfers to Tenant all of the Hospital's working capital existing on the Commencement Date, including all accounts receivable, cash and cash equivalents, bank accounts, monies due and owing the Hospital, rights to reimbursement from any third parties, prepaid expenses of every kind and nature and inventories and supplies. Landlord represents that the net book value of the working capital (after appropriate allowances for bad debts and obsolete inventories and supplies) will be at least $50,000. 4.2 REPRESENTATIONS CONCERNING WORKING CAPITAL. Landlord represents and warrants to Tenant that Landlord owns all of the assets sold to Tenant under Section 4.1 free and clear all liens, encumbrances, defenses or set-offs or charges of any 3 9 nature whatsoever, subject to the release of security interests therein held by the holder of the First Mortgage. 5 LIABILITIES. 5.1 SUCCESSOR LIABILITIES. Tenant is not and is not to be deemed to be a successor of Landlord's business or operations at the Hospital. It is expressly understood and agreed that Tenant has not and does not assume or agree to assume any liability or obligation whatsoever of Landlord or of Hospital, except as expressly agreed to in writing by Tenant. 5.2 CURRENT LIABILITIES. Tenant does hereby assume and agree to pay all of the current liabilities of the Hospital as of the Commencement Date as set forth on Schedule 5.2. For this purpose, current liabilities means only those liabilities with a scheduled maturity date of less than 12 months, except that the current portion of any long term debt will not be treated as a current liability. Landlord represents that the current liabilities will not exceed $1,750,000. Tenant commits to reduce the payable by approximately $300,000 to $400,000 within 60 days after the Commencement Date. 5.3 ASSUMED CONTRACT. Tenant assumes and agrees to pay and perform Landlord's obligations under the contracts and leases set forth on Schedule 5.3 (the "Assumed Contracts"), but only to the extent the obligations accrue during the Lease Term. 5.4 EXCLUDED LIABILITIES. Without limiting Section 5.1, Tenant specifically does not assume any of the following liabilities (collectively, the "Excluded Liabilities"): 5.4.1 MEDICARE REIMBURSEMENT: COST REPORTS. All claims under Medicare or Medi-Cal or by any third party payor for recapture of depreciation, cost report settlements, charges, billings or other amounts arising out of operation of the Hospital prior to the Commencement Date or the termination of Landlord's operations at the Hospital. Landlord hereby grants Tenant the right, but not the obligation, to appeal all Medicare, Medi-Cal or other third party payor decisions related to periods prior to the Commencement Date. Tenant will remit to Landlord 67% of any recovery under such appeal or appeals, after deducting all costs incurred, and Tenant will be entitled to retain the remainder of any such recovery. If no recovery is made, Tenant will bear all costs of the appeal. 5.4.2 MALPRACTICE LIABILITIES. Malpractice liability for any action, failure to act or event occurring prior to the Commencement Date. 5.4.3 EMPLOYEE BENEFIT PLANS. Obligations or liabilities to employees of Landlord under any employment benefit 4 10 plans, except for accrued amounts included as current liabilities under Section 5.2. 5.4.4. CERTAIN LIABILITIES. Any liability relating to Landlord's balance sheet item denoted as "Due to third-party-prior" in excess of the amount of such liability as of the Commencement Date; and all long-term debt. 5.4.5 OTHER LIABILITIES. Any other liability, claim, cost, debt or obligation, whether liquidated or unliquidated, contingent or otherwise, not expressly assumed by Tenant in writing. 5.5 PAYMENT OF EXCLUDED LIABILITIES. Landlord will promptly pay all Excluded Liabilities as the same become due. If Landlord fails to pay an Excluded Liability within 10 days after request by Tenant, Tenant may pay the same. Landlord will promptly reimburse Tenant for such amounts together with interest at the rate of 12 percent per year until paid in full. The unreimbursed balance of the Excluded Liabilities paid by Tenant together with interest thereon is referred to herein as the "Excluded Liabilities Account." If Tenant exercises its option to purchase the Hospital under SECTION 8, Tenant will be entitled to a credit against the purchase price for the then existing balance of the Excluded Liabilities Account. Upon expiration or termination of this Lease for any reason (other than the purchase of the Hospital by Tenant), Landlord will pay the then existing balance of the Excluded Liabilities Account within 15 days after the expiration or termination. Any amounts not paid will be treated in the same manner as other unpaid amounts in accordance with Section 31.2. Tenant may apply Development Funds to pay Excluded Liabilities. However, only Development Funds not attributable to property tax revenues of the District will reduce the balance of the Excluded Liabilities Account. Development Funds attributable to property tax revenues of the District may be used to pay Excluded Liabilities, but will not reduce the balance of the Excluded Liabilities Account. 6 PURCHASE PRICE OF WORKING CAPITAL. 6.1 PRICE. The purchase price of the working capital will be the difference between the net book value of the working capital purchased under Section 4.1 and the net book value of the current liabilities assumed under Section 5.2. On or about the Commencement Date, Tenant and Landlord will agree on and Tenant will pay the tentative purchase price. Tenant may withhold up to 20% of the tentative purchase price pending determination of the final price; provided that Tenant must pay a enough of the price to enable Tenant to have sufficient funds to bring the First Mortgage current. The final price will be agreed upon by Tenant and Landlord as soon as possible thereafter, with the goal of reaching agreement within 60 days after the 5 11 Commencement Date. In determining the final price, the parties will consider the adequacy of Landlord's allowance for bad debts in light of Tenant's experience in collecting accounts receivables after the Commencement Date and Tenants's evaluation of any obsolescence of inventories and supplies. If Tenant and Landlord are unable to agree on the final price within the 60 days, either may require an audit of Landlord's balance sheet as of the Commencement Date, the results of which will be final and conclusive. The difference between the interim payment and the final price will be paid within 10 days after the final price is mutually agreed or determined by audit. The auditor will be mutually selected and the auditor's fees and expenses will be split equally between Landlord and Tenant. 6.2 APPLICATION OF FUNDS. The initial rent payment and the purchase price of the working capital will be applied first to past due debt service on the First Mortgage. Tenant will pay the funds directly to the holders of the First Mortgage and the Help Note or require Landlord to enter into an escrow or similar arrange to assure application of the funds to the holders of the First Mortgage and the Help Note. The balance of the funds, if any, will be paid to Landlord. 7 EMPLOYEES. Although Landlord understands and agrees that Landlord cannot bind Tenant relative to the retention of the present employees of the Hospital, Tenant's present intention is to hire a majority of the current staff. Tenant will evaluate the current staff and use reasonable efforts, consistent with prudent management and employment practices, to offer employment to a majority of the Hospital's current employees, provided such employees satisfy Tenant's employee performance standards. Nothing in this Lease will create any rights in any Hospital employee to bring an action against Landlord or Tenant for wrongful termination in the event he or she is not offered employment by Tenant. 8 OPTION TO PURCHASE. Landlord grants to Tenant the exclusive option to purchase the Hospital on the following terms: 8.1 NOTICE. The option is exercisable at any time during the Lease Term on or after the third anniversary of the Commencement Date by written notice to Landlord. The notice will state that Tenant wishes to purchase the Hospital and reference this section. The notice will specify a closing date, which will be not less than 30 or more than 180 days after the date of the notice. 8.2 PURCHASE PRICE. The purchase price for the Hospital will be equal to the greater of the amounts set forth in Sections 8.2.1 and 8.2.2, in each case subject to the adjustments in Section 8.2.3: 6 12 8.2.1 The then unpaid principal balances of the First Mortgage and the Help Note. 8.2.2 The sum of (a) the current fair market value of the land constituting the Real Property, adjusted for inflation as described below and (b) the current fair market value of the improvements, fixtures and equipment on the Real Property, less accumulated depreciation on the basis set forth below. Current fair market value will be the fair market value as of January 1, 1993 as determined by an appraisal to be conducted by Valuation Counselors Group, Inc, of Dallas Texas, within 90 days after the Commencement Date. Tenant will pay the cost of the appraisal. The appraiser will be instructed to separately value land from improvements, fixtures and equipment, and to assign estimated remaining useful lives to each class of improvements, fixtures and equipment. The value assigned to the land by the appraisal will be adjusted for inflation through the date of the notice of exercise based on the change since January 1, 1993 in the Consumer Price Index (Riverside County metropolitan area, all urban consumers, all items) published by the United States Department of Labor (or successor index). The appraised value of the land will be multiplied by a fraction, the numerator of which is the index number for the calendar month in which the option is exercised and the denominator of which is the index number for the month of January 1993. The resulting product will be the value of the land for purposes of the option to purchase. The value assigned to the improvements, fixtures and equipment will be depreciated on a straight line basis over the estimated remaining useful lives established by the appraiser. The net depreciated value will be added to the inflation-adjusted land value to determine the amount under this SECTION 8.2.2. 8.2.3 The greater of the amounts set forth in Section 8.2.1 or 8.2.2 will be increased by (i) the net book value of the Capital Improvements (as defined below) made on and after the Commencement Date, but only to the extent paid with Development Funds (as defined below), and decreased by (ii) the sum of the Reserve Payments paid by Tenant and the then unpaid balance, if any, of the Excluded Liabilities Account referenced in SECTION 5.5. In determining net book value, Landlord will be deemed to use the depreciation schedules used by Tenant to depreciate similar assets. 8.3 CLOSING. The purchase price will be paid in cash, except that Tenant may, with the approval of the holders of the First Mortgage and the Help Note, assume the First Mortgage and/or the Help Note, as the case may be, and receive a credit against the purchase price for the assumed amount. At the closing, Landlord will execute and deliver to Tenant a warranty deed and one or more bills of sale and certificates of title conveying the Hospital to Tenant free and clear of all liens and 7 13 encumbrances other than liens and encumbrances (a) listed on Schedule 11.4, except for (i) the First Mortgage and the Help Note, each of which will be paid in full or assumed by Tenant at the closing and (ii) liens securing Assumed Contracts that are fully satisfied before the closing, or (b) created or imposed by or with the written consent of Tenant. Tenant may condition its purchase on the receipt of a commitment for title insurance (at Tenant's expense) in a form reasonably acceptable to Tenant. 9 RIGHT OF FIRST REFUSAL TO PURCHASE HOSPITAL. This Section 9 will become effective if Tenant purchases the Hospital. In that event, Tenant grants to Landlord a right of first refusal with respect to any proposed sale or transfer by Tenant of the Hospital on the terms set forth below: 9.1 NOTICE. If Tenant receives a bona fide offer to purchase or otherwise accept a transfer of the Hospital, which offer Tenant is willing to accept, Tenant will notify Landlord of its desire to do so. The notice will set forth the price and terms of the proposed transaction. Landlord will have a period of 60 days after receipt of the notice to agree to purchase the Hospital at the proposed price and terms. If Landlord does not provide written acceptance of the offer within the 60-day period, Landlord will be deemed to have rejected its right to purchase the Hospital. If Landlord fails to accept the offer within the 60-day period, Tenant may sell the Hospital upon terms not materially more favorable to the purchaser than those set forth in the notice during the 180-day period following expiration of the 60-day period. If Tenant does not close the sale (or enter into a binding agreement pursuant to which the sale is closed no later than 60 days thereafter) within the 180-day period, the Hospital will again become subject to this restriction on transfer and will not be sold without being reoffered to Landlord in accordance with this section. 9.2 EXCEPTION. The right of first refusal will not apply to (a) any transfer of all or any part of Tenant's interest in the Hospital under a mortgage, trust deed or other security instrument as collateral for obligations of Tenant, (b) any sale or transfer of all or any part of the Hospital at a judicial or non-judicial foreclose or such liens or a transfer of the Hospital in lieu of foreclosure, or (c) any sale and leaseback of the Hospital that is essentially a financing transaction. 10 OPTION TO PURCHASE BY LANDLORD. This Section 10 will become effective if Tenant purchases the Hospital. In that event, Tenant grants to Landlord an option to purchase the Hospital on the following terms: 10.1 CONDITION PRECEDENT. The option to purchase will become exercisable only if Tenant ceases to operate the 8 14 Hospital as an acute care hospital; provided, however, that the option will not become exercisable if the decision to cease operations is based on a determination that the Hospital is not economically feasible because alternative acute care facilities are then available in Blythe, California or its immediate vicinity. 10.2 NOTICE. Tenant will give Landlord at least 90 days' advance written notice of the date Tenant intends to cease operating the Hospital as an acute care Hospital. The option is exercisable by written notice to Tenant given within 90 days after Landlord has actual or constructive notice that Tenant intends to cease operating the Hospital as an acute care hospital. The notice will state that Landlord wishes to purchase the Hospital and reference this section. The notice will specify a closing date, which will be not less than 30 or more than 180 days after the date of the notice. 10.3 PURCHASE PRICE. The purchase price for the Hospital will be the greater of (a) one dollar ($1.00) plus the satisfaction or assumption by Landlord by of all then existing liens and encumbrances on the Hospital and its equipment and fixtures or (b) the purchase price paid by Tenant upon its purchase of the Hospital under Section 8.2. 10.4 TERMINATION. This option to purchase will terminate upon any sale or transfer of the Hospital (subject to Landlord's right of first refusal under SECTION 9) or upon Landlord's failure to give timely notice of exercise of the option. 11 REPRESENTATIONS AND WARRANTIES OF LANDLORD. Landlord represents and warrants to Tenant that: 11.1 ORGANIZATION. Landlord is a nonprofit corporation organized and validly existing under the laws of the state of California. Landlord is qualified as a tax-exempt organization in accordance with Section 501(c)(3) of the Internal Revenue Code of 1986. 11.2 AUTHORITY. Landlord has all requisite power and authority to enter into this Lease and to perform and consummate transactions contemplated hereby. The execution and delivery of this Lease and the performance and consummation by Landlord of the transactions contemplated hereby have been duly authorized by all requisite action and have complied and will be in compliance with all applicable laws and regulations. This Lease has been duly executed and delivered by Landlord and constitutes the valid and binding obligation of Landlord, enforceable in accordance with its terms. 9 15 11.3 EFFECT OF AGREEMENT. The execution and delivery of this Lease by Landlord do not, and the performance and consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, conflict with, result in a breach of, constitute a default (with or without notice or lapse of time, or both) under or violation of, or result in the creation of any lien, charge or encumbrance pursuant to any provision of applicable federal, state or local law or regulation, or any provision of any agreement, instrument, understanding, order, judgment or decree to which Landlord or the Hospital is a party or by which Landlord or the Hospital or any of their properties is bound or affected, nor will it give to any other person or entity any interest or rights of any kind to bring a legal action concerning any of the foregoing. 11.4 WARRANTY OF TITLE. Landlord owns the Hospital free and clear from all liens, encumbrances and charges except as set forth on Chicago Title Company (Riverside, California office) Preliminary Title Report No. 545476-30 dated December 3, 1992 and on SCHEDULE 11.4. There are no mechanic's liens against the Hospital and the period during which any such liens could be filed has expired. No assessments for public improvements have been made against the Real Property which remain unpaid and Landlord has no knowledge and has received no notice of any proposed assessment for public improvements. 11.5 FINANCIAL STATEMENTS. Attached as SCHEDULE 11.5 is Landlord's balance sheet dated October 31, 1992 (the "BALANCE SHEET"). To the best of Landlord's knowledge, the Balance Sheet fairly presents the financial condition of Landlord as of such date and was prepared in accordance with generally accepted accounting principles on a basis consistent with that used in prior periods. 11.6 UNDISCLOSED LIABILITIES. Except for liabilities set forth in the Balance Sheet or on SCHEDULE 11.6, and any liabilities incurred since October 31, 1992 in the ordinary course of business in accordance with past operations and practices, to the best of Landlord's knowledge, neither Landlord nor the Hospital is subject to any liabilities or obligations of any kind, whether accrued, absolute, contingent or otherwise. Landlord does not know of, nor does it have any reasonable ground to know of, any basis for the assertion against Landlord or the Hospital of any such liability. 11.7 ACCOUNTS RECEIVABLE. To the best of knowledge of Landlord, after reasonable investigation, the accounts receivable of Landlord to be purchased under SECTION 4.1 arose from bona fide transactions in the ordinary course of Landlord's business and the allowance for bad debts is appropriate and sufficient. 10 16 11.8 EMPLOYEE BENEFIT PLANS. Schedule 11.8 sets forth all employee benefit plans of Landlord, as that term is defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). All actions and operations with respect to such plans, and all prior plans, have been made in all material respects in accordance with the terms and requirements of such plans, the Internal Revenue Code of 1986, as amended (the "Code"), ERISA, and all applicable final or temporary regulations. Landlord is not a party to any Multi-Emloyer Employee Benefit Plan within the meaning of SECTION 3(37) of ERISA and Section 414(f)(1) of the Code. 11.9 LITIGATION. No action, suit, proceeding or investigation is pending or threatened against Landlord or Hospital before any governmental entity seeking to restrain or prohibit, or to obtain specific damages, in respect of this Lease or the transactions contemplated hereby. There is no action, suit or proceeding pending, threatened against or affecting the Landlord or the Hospital or relating to or arising out of the ownership, management or operation of the Hospital, including with respect to claims for medical or other professional malpractice or employment matters, except as set forth on SCHEDULE 11.9. 11.10 TRANSACTIONS WITH CERTAIN PERSONS. To the best of Landlord's knowledge, none of the officers or directors of Landlord or any relative of any of them have any direct or indirect interest in any firm or corporation that has any material business relationship or has had a material transaction with Landlord since January 1, 1991, excluding, for this purpose, transactions and relationships in the ordinary course between the Hospital and physicians who serve as officers or directors of Landlord. 11.11 CONSENTS. No consents or approvals are required to be obtained from any governmental agency or any third party in connection with the execution and performance by Landlord of this Lease except as set forth on SCHEDULE 11.11. 11.12 COMPLIANCE WITH LAWS. The Hospital is in material compliance with all applicable laws, regulations, restrictions, orders, judgments, writs and injunctions of courts and government authorities having jurisdiction over the Hospital. Without limiting the foregoing, the Hospital is in material compliance with applicable building, safety, health, fire, environmental and zoning laws and regulations. 11.13 GOVERNMENT APPROVALS. The Hospital has all permits, licenses, orders and approvals of all federal, state and local governmental and regulatory bodies required for Hospital to conduct its business as presently conducted, and is in material compliance with all requirements for maintenance of such permits, 11 17 licenses, orders and approvals. The Hospital is certified by appropriate state and federal authorities for Medicare and Medi-Cal programs. All such permits, licenses, orders and approvals are valid and in good standing, free from material restriction, waiver or limitation, and no suspension or cancellation is threatened. No such permits, licenses, orders or approvals will be adversely affected by the consummation of the transactions contemplated by this Lease. 11.14 LABOR MATTERS. No employee of the Hospital is party to or the subject of any collective bargaining or employment agreement of any kind. 11.15 FINDER'S FEE. Landlord has not engaged any person who is entitled to a fee or commission as finder or broker as a result of this transaction. 11.16 ZONING. The Real Property is properly zoned (or any variances required have been properly obtained and are non-appealable) for the operation of the Hospital, and all necessary governmental consents, permits and approvals for such use and operation have been obtained. 11.17 NO CONTRACTS. Except for the Assumed Contracts, the Hospital will not be subject to any employment, management, equipment, supply or maintenance contracts. Tenant shall be under no obligation to hire, or recognize any responsibility to, any person, persons or companies employed by Landlord or Hospital, except for the Assumed Contracts. The Hospital is in material compliance with each Assumed Contract (except for any accrued or past due liabilities included in the current liabilities referenced in Section 5.1) and, to the best of Landlord's knowledge, the other parties to the Assumed Contracts are in material compliance therewith. 11.18 HILL-BURTON LIABILITY. Landlord has no liability under the Hill-Burton Program and Tenant will have no liability or obligation, as transferee of the Hospital or otherwise, under the Hill-Burton Program as a result of this Lease. 11.19 ENVIRONMENTAL MATTERS. 11.19.1 To the best of Landlord's knowledge, Landlord and the Hospital are not subject to any existing or pending investigation or action by any federal, state, or local governmental authority under any Environmental Law (as defined below). 11.19.2 To the best of Landlord's knowledge, no Hazardous Substance (as defined below) has at any time been generated, used, stored, released, or disposed of on, under or 12 18 from the Hospital; Landlord has filed all reports and documents required to be filed under applicable Environmental Law with respect to the Hospital. There are no underground tanks on the Hospital; and the Hospital is free from any Hazardous Substance, in each case except as set forth on SCHEDULE 11.19. 11.19.3 The term "Environmental Law" means any federal, state, or local law, statute, ordinance, or regulation pertaining to health, industrial hygiene, the use or disposal of Hazardous Substances or the environmental conditions (including soil and groundwater conditions) on, under, or about the Hospital, including, without limitation (i) the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 USC Section 9601 et seq., and (ii) the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 USC Section 6901 et seq. The term "release" will have the meaning given to it by CERCLA. 11.19.4 The term "Hazardous Substance" includes without limitation the following: (a) Those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances," "hazardous wastes," or "solid wastes" in CERCLA; RCRA; the Hazardous Materials Transportation Act, 42 USC ss.1801 et seq.; and the Clean Water Act, 33 USC ss.1251 et seq.; and in the regulations promulgated pursuant to such statutes; (b) Those substances defined as "hazardous substances," "hazardous materials," "toxic substances," "hazardous wastes," "dangerous wastes," or "solid wastes," in applicable California state and local environmental statues and in any regulations promulgated pursuant to such statutes; (c) Those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or by the Environmental Protection Agency as hazardous substances (40 CFR part 302 and amendments thereto); (d) Such other substances, materials and wastes as are or become regulated, or are classified as hazardous or toxic under federal, state of local laws or regulations; and (e) Any material, waste or substance which is or which contains (i) asbestos, (ii) polychlorinated biphenyls, or (iii) radioactive materials. 13 19 11.19.5 Notwithstanding this SECTION 11.19, Tenant will be responsible, and Landlord will have no liability, for any Hazardous Substance introduced to the Hospital after the Commencement Date or for any violation of an Environmental Law occurring in the Hospital after the Commencement Date, unless the introduction or violation is caused by Landlord or a party acting under Landlord. 11.20 BANK ACCOUNTS. SCHEDULE 11.20 sets forth a correct and complete list of all (a) accounts or deposits of Landlord with banks or other financial institutions, (b) safe deposit boxes of Landlord used in the operation of the Hospital, (c) persons authorized to sign or otherwise act with respect thereto, and (d) powers of attorney for Landlord or the Hospital. Landlord will sign all documents and instruments necessary to transfer such items to Tenant and, if requested by Tenant, to eliminate the authority of the persons referenced in (c) and (d). 12 REPRESENTATIONS AND WARRANTIES OF TENANT. Tenant represents and warrants to Landlord that: 12.1 ORGANIZATION. Tenant in a corporation organized and validly existing under the laws of the state of Oregon. Tenant is qualified to conduct business in California. 12.2 AUTHORITY. Tenant has all requisite power and authority to enter into this Lease and to perform and consummate transactions contemplated hereby. The execution and delivery of this Lease and the performance and consummation by Tenant of the transactions contemplated hereby have been duly authorized by all requisite action and have complied and will be in compliance with all applicable laws and regulations. This Lease has been duly executed and delivered by Tenant and constitutes the valid and binding obligation of Tenant, enforceable in accordance with its terms. 12.3 EFFECT OF AGREEMENT. The execution and delivery of this Lease by Tenant do not, and the performance and consummation of the transactions contemplated hereby and compliance with the provisions hereof will not, conflict with, result in a breach of, constitute a default (with or without notice or lapse of time, or both) under or violation of, or result in the creation of any lien, charge or encumbrance pursuant to any provision of applicable federal, state or local law or regulation, or any provision of any agreement, instrument, understanding, order, judgment or decree to which Tenant is a party or by which Tenant or any of its properties is bound or affected, nor will it give to any other person or entity any interest or rights of any kind to bring a legal action concerning any of the foregoing. 14 20 12.4 LITIGATION. No action, suit, proceeding or investigation is pending or threatened against Tenant before any governmental entity seeking to restrain or prohibit, or to obtain specific damages, in respect of this Lease or the transactions contemplated hereby. 12.5 LICENSES. As of the Commencement Date, Tenant will have obtained all required licenses, permits, certificates, approvals and authorizations needed for operation of the Hospital and consummation of the transactions contemplated under this Agreement. 12.6 INSPECTION. Tenant has conducted a full inspection of the Hospital and reviewed all of the documents related to the Hospital that it wished to review. 12.7 ACCURACY. The representations, warranties, and other documents given by Tenant are complete, accurate and not misleading. 13 LANDLORD'S COVENANTS. Landlord covenants to Tenant to undertake the following during the Lease Term: 13.1 QUIET ENJOYMENT. If Tenant discharges Tenant's obligations under this Lease, Landlord will assure that Tenant will have and enjoy, during the Lease Term, the quiet and undisturbed possession of the Hospital together with the right to use the Hospital as contemplated in this Lease. 13.2 FIRST MORTGAGE. Landlord will apply the rent, less $1.00 per year, exclusively to debt service on the First Mortgage and the Help Note until the First Mortgage and Help Note are paid in full. 13.3 RESTRICTIVE COVENANTS. Landlord will not take any action that adversely affects the Hospital or which interferes with Tenant's use and occupancy of the Hospital. 13.4 ENCUMBRANCES. Landlord will not sell or lease the Hospital or create or allow the imposition of any lien, encumbrance, security interest, covenant, condition, reservation, restriction, easement, charge, or adverse claim on or to the Hospital, without the prior written consent of Tenant. 13.5 FUND RAISING. Landlord will use its best efforts to undertake a community-wide fund drive and/or obtain passage of Palo Verde Hospital District bonds, which collectively will raise $150,000 to $250,000 in Development Funds per year for each of calendar years 1993, 1994, 1995 and 1996. Tenant will provide reasonable assistance and cooperation. 15 21 14 TENANT'S COVENANTS. Tenant covenants to Landlord to undertake the following during the Lease Term: 14.1 USE OF HOSPITAL. Tenant will use the Hospital to operate an acute care hospital and ancillary services for Blythe and the surrounding community. Tenant will also make available 24-hour emergency services. Tenant may use the Hospital to provide any services which now or in the future are customarily provided by hospitals and other health care facilities. Tenant will operate the Hospital in accordance with sound business judgment, appropriate professional standards and all applicable laws and regulations. 14.2 ASSUMED CONTRACTS. Tenant will perform the obligations of Landlord under each Assumed Contract. 14.3 HOSPITAL SUPPORT AGREEMENT. Tenant will perform its obligations under the Hospital Support Agreement (referenced below). 14.4 FINANCIAL STATEMENTS. Tenant will provide Landlord with the quarterly unaudited financial statements and, if available, annual audited financial statements, for the Hospital within 30 days after completion. 14.5 EDUCATION. Tenant will provide Landlord with information and recommendations on seminars and conferences which the directors of Landlord might find applicable to their duties. 14.6 MEDICAL OFFICE BUILDING. Tenant will investigate the feasibility of developing a medical office building in close proximity to the Hospital. The project is intended to be a joint venture between Tenant or its affiliates and Blythe area physicians. Tenant cannot predict whether the project is feasible or the size of the project. Tenant will deliver a feasibility report to Landlord within one year after the Commencement Date. 14.7 EXPANSION. Tenant will not build or develop any new buildings on the Real Property until it has prepared and Landlord has approved a master site plan. 14.8 INSPECTION. Landlord may enter and inspect the Hospital at all reasonable times. 15 SERVICES AND UTILITIES. Tenant will pay when due all charges for utilities incurred during the Lease term in connection with Tenant's operation of the Hospital, including, but not limited to, charges for fuel, water, gas, electricity, sewage disposal, power, refrigeration, heating, ventilation, air conditioning and janitorial services. All charges will be prorated between Landlord and Tenant as of the Commencement Date. 16 22 16 MAINTENANCE AND REPAIR. 16.1 ROUTINE MAINTENANCE. Tenant will provide at its expense all normal and routine day-to-day maintenance and repairs to the Hospital ("Routine Maintenance"). 16.2 CAPITAL IMPROVEMENTS. Tenant will be responsible to apply the Development Funds (as defined below) for the following items of maintenance, repair and equipping of the Hospital ("Capital improvements") 16.2.1 Structural repairs including, but not limited to, foundations, floors, exterior ceilings, exterior walls and roofs and all maintenance and repairs necessitated by structural disrepair or defect; 16.2.2 Repair of sidewalks, driveways, service areas, curbs and parking areas; 16.2.3 Uninsured repairs or restoration made necessary by fire or other peril; 16.2.4 Repairs or replacements of portions of the Real Property which are capital improvements or which extend the useful life of the Real Property beyond that normally obtained by routine day-to-day maintenance and repairs; 16.2.5 Major repairs or replacements of equipment leased to Tenant where such repairs or replacements are capital improvements or which extend the useful life of the equipment beyond that normally obtained by routine day-to-day repairs and maintenance; 16.2.6 Repairs or replacements of electrical systems, water, sewer and plumbing systems, air conditioning and heating systems and other major operating systems of the Hospital to the extent repairs or replacements are capital improvements or extend the useful life of such systems beyond that obtained by routine day-to-day repair and maintenance; 16.2.7 Capital improvements to the Hospital; 16.2.8 Repainting, redecoration and remodeling; and 16.2.9 Purchase of new equipment or the upgrade of old equipment. 16.3 TENANT PURCHASES. Tenant may, but is not obligated, make Capital Improvements from sources other than Development Funds. Tenant commits to purchase or lease a CT scanner and mammography equipment and to expend at least $50,000 17 23 on renovations and repairs within six months after the Commencement Date. From time to time Tenant will purchase or lease other equipment it deems reasonably necessary for Hospital operations. 17 DEVELOPMENT FUNDS. 17.1 USE OF FUNDS. Landlord will make available to Tenant for the purpose of making Capital Improvements, the funds listed below (collectively, the "DEVELOPMENT FUNDS"): 17.1.1 Funds raised by Landlord in its fund drives, net of expenses; 17.1.2 Approximately $12,000, representing the current balance of Landlord's restricted funds available to make Capital Improvements; 17.1.3 Approximately $5,000, representing the current balance of funds available to Landlord under the replacement reserve account maintained in connection with the First Mortgage, and any future additional funds available from the reserve; and 17.1.4 All funds and other assets contributed to the Association by the Palo Verde Hospital District under the Hospital Support Agreement referenced in Section 35.3. 17.2 DEPOSIT AND USE OF FUNDS. The Development Funds will be transferred to Tenant, as trustee, as soon as reasonably available, for the purpose of making Capital Improvements. Interest earned on the Development Funds will be used for the same purpose. Tenant may use the Development Funds in its discretion to make Capital Improvements. Tenant may, but is not obligated to, use its own funds for Capital Improvements. Tenant will not use the Development Funds for any purpose other than Capital Improvements and the payment of Excluded Liabilities without the approval of the Advisory Board to be formed under the Hospital Support Agreement. Tenant will provide to Landlord, at least annually, a written report as to the deposit and use of the Development Funds. Landlord may, no more frequently than once per year, employ a certified accountant to audit the records of the Development Fund. The audit will occur during regular business hours after reasonable notice to Tenant. 17.3 OWNERSHIP AND INCLUSION IN LEASE. All Capital Improvements will be the property of Landlord, will be automatically included as components of the "Hospital" and subject to this Lease. Tenant will have no obligation to pay additional rent as a result of the Capital Improvements or the use of the Development Funds. Upon termination or expiration of this Lease, the balance of the Development Funds (less reserves 18 24 to pay for committed Capital Improvements) will revert to Landlord and the District, pro rata in accordance with their respective cumulative contributions. 18 PROFITS PARTICIPATION. Tenant will pay to Landlord as additional rent during the term of this Lease a portion of Tenant's profits from operation of the Hospital as follows: 18.1 PERCENTAGE. Tenant will pay to Landlord one percent (1%) of Tenant's "Net Income" for each $100,000 of cumulative Development Funds transferred to Tenant, to a maximum of ten percent (10%). For this purpose, Development Funds will not include (a) any Development Funds attributable to property tax revenues of the Palo Verde Hospital District and (b) any Development Funds not attributable to property tax revenues of the District used to pay Excluded Liabilities. The net amount of such Development Funds herein referred to as "Non-Tax Development Funds"). No profits will be earned until cumulative Non-Tax Development Funds transferred reach $100,000, and will then be earned on the following schedule:
When Cumulative Non-Tax The Percentage of Net Development Funds Reach: Income Earned will be: ------------------------ ---------------------- Less than $100,000 00% $100,000 01% $200,000 02% $300,000 03% $400,000 04% $500,000 05% $600,000 06% $700,000 07% $800,000 08% $900,000 09% $1,000,000 and over 10%
18.2 PAYMENT. The profits participation will accrue during each calendar year at the profits percentage in effect on the first day of the year. A transfer of Non-Tax Development Funds will not affect the then current year's accrual rate or have any retroactive affect on prior years' accruals. Tenant will pay the profits participation annually within 60 days after the end of each calendar year with respect to Net Income during the calendar year at the profits percentage in effect on the first day of the calendar year. Each payment will be accompanied by a statement setting forth the calculation. Landlord or its representatives may inspect and audit Tenant's records during regular business hours to verify Net Income. 18.3 NET INCOME. Net Income means Tenants's net income after taxes for the Hospital. Net Income will be determined using generally accepted accounting principles on a 19 25 consistent basis. Net Income will include a rateable allocation of Tenant's corporate overhead. An assumed combined federal and state income tax rate of forty percent (40%) will be used. 18.4 TERMINATION. The profits participation will terminate upon expiration or termination of this Lease for any reason; provided expiration or termination will not affect any profits participation earned prior to such event. 19 LIENS. Tenant will pay when due all claims for work done on or for services rendered or material furnished to the Hospital at Tenant's request, and will keep the Hospital free from any liens, other than liens created by Landlord. Tenant may, however, withhold payment of any claim in connection with a good faith dispute over the obligation to pay, so long as Landlord's property interests are not jeopardized. 20 TAXES AND ASSESSMENTS. 20.1 REAL PROPERTY. During the Lease Term Tenant will pay all real estate taxes levied on the Real Property. 20.2 PERSONAL PROPERTY. During the Lease Term Tenant will pay all personal property taxes levied on all the personal property used or useful in the operation of the Hospital. 20.3 ASSESSMENTS. Tenant will pay all assessments against the Hospital which are attributable to the period of time that Tenant occupies the Hospital. If any assessment can be paid over a term of years, Tenant will have the option to accept extended payment and will pay only those payments due during the Lease Term. 20.4 OBJECTION TO VALIDITY OR AMOUNT OF TAX. If Tenant objects in good faith to the validity or amount of any tax or assessment which it is required to pay, Tenant, at its sole expense, may contest the validity or amount of such tax or assessment and Landlord will join in any documents necessary for such contest. Any rebate received on account of any tax or assessment paid by Tenant will be paid to Tenant. 20.5 EXPIRATION OR TERMINATION. All taxes and assessments will be prorated as of the expiration or termination of this Lease (other than by reason of Tenant's purchase of the Hospital). Tenant will also pay any real and personal property taxes assessed prior to expiration or termination with respect to the portion of the then current years' assessment applicable to the period after the expiration or termination to the extent not abated by reason of Landlord's tax-exempt status. 20 26 21 INSURANCE. 21.1 LIABILITY INSURANCE. Tenant will obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant's use or occupancy of the Premises and all surrounding areas. Such insurance will be in an amount of not less than $1,000,000 for injury to or death of one person in any one accident or occurrence, and in an amount of not less than $1,000,000 for injury to or death of more than one person in any one accident or occurrence. Such insurance will further insure Landlord and Tenant against liability for property damage of at least $100,000. 21.2 PROPERTY INSURANCE. Tenant will obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Hospital in amounts and coverages Tenant deems prudent. 21.3 PROFESSIONAL LIABILITY INSURANCE. Tenant will obtain and keep in force during the term of the Lease Term professional liability insurance insuring Tenant and Landlord in amounts and against the risks ordinarily insured by standard professional liability insurance available to the hospitals. 21.4 WAIVER OF SUBROGATION. Tenant and Landlord each waives any and all rights of recovery against the other, or against the officers, employees, agents and representatives of the other, for loss or damage to such party or its property or the property of others under its control, where such loss or damage results from any of the risks covered by a standard fire insurance policy with extended coverage or from any of the risks covered under any insurance policy in force at the time of such loss or damage. Tenant and Landlord will provide notice to the insurance carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 21.5 INSURANCE POLICIES. Landlord and the holder of the First Mortgage each will be named as an additional insured on all policies. All insurance policies described above will contain a provision or an endorsement acknowledging that the policy cannot be terminated without thirty (30) days' prior written notice to Landlord and the holder of the First Mortgage. Tenant may elect to assume any of Landlord's insurance policies with the consent of the insurance company. In this case, premiums will be prorated between Landlord and Tenant as of the Commencement Date. 21 27 22 DAMAGE OR DESTRUCTION. 22.1 TERMINATION. If the Hospital is damaged or destroyed from any cause whatsoever, whether or not such damage or destruction is covered by any insurance required to be maintained under Section 21, to such an extent that twenty percent (20%) or more of the Hospital is unusable by Tenant for a period of 60 days or more, Tenant will have the right to terminate this Lease without liability upon 30 days' written notice in writing to Landlord given not later than 60 days after the occurrence of such damage or destruction. 22.2 RECONSTRUCTION. In the event the Hospital is damaged or destroyed under circumstances not resulting in termination of this Lease under SECTION 22.1, Tenant will repair, restore and rebuild the Hospital to its condition existing immediately prior to such damage or destruction and this Lease will continue in full force and effect. Such repair, restoration and rebuilding will be commenced immediately after such damage or destruction and will be diligently prosecuted to completion. Tenant's obligation to repair, restore and rebuild is limited to the application of the proceeds of insurance payable to Tenant and Landlord as a result of the damage or destruction. Both Tenant and Landlord will apply all such insurance proceed to the effort. Neither Tenant nor Landlord is obligated to pledge, contribute or expend any other funds, or to guaranty any loans, in connection with the rebuilding effort. 23 CONDEMNATION. 23.1 TERMINATION. If all or any portion of the Hospital or Tenant's interest in this Lease is acquired or condemned by any governmental authority under its power of eminent domain for any public or quasi-public use or purpose, or if the Hospital or Tenant's interest in this Lease is conveyed under threat of condemnation (any such event termed a "Taking"), Tenant will have the option to terminate this Lease by notice given to Landlord within one hundred eighty (180) days of such Taking. In the event that such a notice of termination is given, this Lease will terminate as of the date of vesting or acquisition of title in the condemning authority and the rents hereunder will be abated on that date. If Tenant does not exercise its option to terminate this Lease, this Lease will continue in force and effect. 23.2 RIGHTS TO AWARD. Upon any Taking, Tenant will be entitled to 100% of the condemnation proceeds or award applicable to its interest in this Lease, including its option to purchase and Capital Improvements paid from a source other than Development Funds. 22 28 24 ASSIGNMENT AND SUBLEASE. This Lease may be assigned and the Hospital may be subleased by Tenant with the consent of Landlord, which consent will not be unreasonably withheld. Tenant may at any time sublease all or any portion of the Hospital to any entity which, directly or indirectly, owns or controls or is owned or controlled by Tenant. 25 DEFAULT BY TENANT. The following will be events of default by Tenant: 25.1 NONPAYMENT. Tenant's failure to pay any rent due within fifteen (15) days after written notice of nonpayment or to pay any other charge under this Lease within thirty (30) days after written notice of nonpayment. 25.2 NONCOMPLIANCE. Tenant's failure to comply with any term or condition or fulfill any obligations of this Lease (other than payment of rent or other charges) continuing thirty (30) days after written notice by Landlord specifying the nature of the default. If the default cannot reasonably be cured within the 30-day period, this provision will be satisfied if Tenant commences correction of the default within the 30-day period and thereafter proceeds with reasonable diligence and in good faith to effect the remedy as soon as possible. 26 LANDLORD REMEDIES ON DEFAULT BY TENANT. In the event of a default by Tenant, Landlord may elect to terminate Tenant's right to possession of the Hospital by giving written notice. The notice will specify the nature of the default and a date for termination, which may be not less than 30 days after the date of the notice. The termination will become effective on the specified date unless all defaults specified in the notice are cured on or before such date. Upon termination, Landlord may re-enter and take possession of the Hospital and remove any persons or property by legal action or by self-help, with the use of reasonable force. Following termination, Landlord will have the right to recover from Tenant unpaid rent and other charges only for the period prior to termination. If the default involves a failure to pay any amounts payable by Tenant under this Lease, Landlord may make such payment and will be entitled to be immediately reimbursed by Tenant together with interest at the rate of 12 percent per year until paid in full. 27 DEFAULT BY LANDLORD. The following will be events of default by Landlord: 27.1 PAYMENT. Landlord's failure to pay any amounts due to Tenant under this Lease within fifteen (15) days' after written notice of nonpayment. 27.2 NONCOMPLIANCE. Landlord's failure to comply with any term or condition or fulfill any obligations of this 23 29 the total Reserve Payments paid by Tenant during the Lease Term. Net book value will be determined by the depreciation schedule used by Tenant. Tenant will use a depreciation schedule permitted by generally accepted accounting principles. The payment will be made within 15 days after the expiration or termination. If the payment is not made in full, Tenant will have a lien on the Hospital (which will include a mortgage or deed of trust and Uniform Commercial Code security interests) to secure repayment of the obligation and the unpaid balance, if any, of the Excluded Liabilities Account. Landlord will execute lien instruments contemporaneously with the execution of this Lease. Tenant may record the instruments if the payment is not made in full when due. Contemporaneously with such purchase, Landlord will assume, and agree to defend and hold Tenant harmless from, all obligations under leases and contracts for equipment, goods, supplies and services for the benefit of the Hospital entered into by Tenant during the Lease Term, other than agreements with Tenant and its affiliates. 31.3 ASSUMED CONTRACTS. Tenant's assumption of the Assumed Contracts will be effective only for the Lease Term. Following expiration or termination of the Lease Term, Tenant will be released from all liability under the Assumed Contracts. Landlord will defend and indemnify Tenant against all claims under the Assumed Contracts arising after the expiration or termination. 31.4 LICENSES. Upon termination or expiration of this Lease, Tenant will: (a) surrender or transfer to Landlord, as appropriate, all licenses, certificates and permits associated with the Hospital; (b) transfer to Landlord all medical records, medical staff records, financial records and other books and records associated with the Hospital; and (c) immediately stop using the name "Palo Verde Hospital" or any similar name. 32 ADVERSE CHANGES. Tenant will have the right to terminate this Lease immediately upon written notice to Landlord without any liability in the event of any adverse material changes in the financial condition or operations of the Hospital prior to the Commencement Date. 33 INDEMNITY. 33.1 LANDLORD'S OBLIGATION. Landlord will hold Tenant harmless from, indemnify Tenant fully for and protect and defend Tenant against any and all claims, demands, liabilities, damages, losses, and expenses, including attorney fees arising out of or in connection with (a) the operation or use of the Hospital before the Commencement Date or (b) the breach of any representation, warranty or covenant of Landlord in this Lease. Notwithstanding the "knowledge" standard applied to Landlord's environmental representations and the attached schedule of known 25 30 exceptions to such representations, Landlord will indemnify Tenant with respect to all violations of Environmental Laws with respect to acts and omissions prior to the Commencement Date, all Hazardous Substances introduced to the Hospital prior to the Commencement Date and all underground tanks in existence prior to the Commencement Date. While Tenant is willing to accept Landlord's environmental representations qualified as to Landlord's knowledge, Tenant demands, as a matter of allocating risks associated with environmental matters, that Landlord agree to accept and bear all claims, demands, liabilities, damages, losses and expenses, including attorney fees, associated with environmental matters and conditions in existence on the Commencement Date, including with respect to matters within Landlord's current knowledge. Notwithstanding the above, Landlord will not indemnify Tenant with respect to the breach of a representation or warranty arising out of actions or omissions by Tenant or its affiliates prior to the Commencement Date. 33.2 TENANT'S OBLIGATION. Tenant will hold Landlord harmless from, indemnify Landlord fully for, and protect and defend Landlord against any and all claims, demands, liabilities, damages, losses, and expenses, including attorney fees arising out of or in with (a) the operation or use of the Hospital during the Lease term or (b) the breach of any representation, warranty, or covenant of Tenant in this Lease. 34 MEMORANDUM OF LEASE. Concurrently with the execution of this Lease, the parties will execute and acknowledge a Memorandum of Lease and Option to Purchase in the form attached as EXHIBIT A, and cause the same to be file in the real property records of Riverside County, California. Tenant will pay the recording charges. 35 CONDITIONS TO TENANT'S OBLIGATIONS. The obligation of Tenant under this Lease are subject to the satisfaction or waiver by Tenant of each of the following conditions on or before the Commencement Date: 35.1 LICENSES. Tenant and Hospital will have received all permits, licenses, orders, certifications and approvals from all federal, state and local governmental and regulatory bodies required to enable Tenant to operate the Hospital under this Lease. 35.2 FIRST MORTGAGE. Tenant, Landlord and the holder of the First Mortgage will have entered into an agreement under which the holder will consent to this Lease and release its security interest in Landlord's working capital, and Tenant and the holder will agree on subordination, attornment and nondisturbance matters. 26 31 35.3 HOSPITAL SUPPORT AGREEMENT. Tenant, Landlord and Palo Verde Hospital District will have entered into a Hospital Support Agreement under which the District will agree to make certain tax revenues available for Capital Improvements and Landlord and the District will form an Advisory Board to the Hospital. 35.4 INSURANCE. Landlord will have obtained a "tail" policy or Tenant will have obtained a claims made policy, insuring Tenant and Landlord against the risks ordinarily insured by standard professional malpractice liability insurance available to the hospitals respect to incidents, errors, omissions and claims which arose, existed or were created before the Commencement Date and with limits and carriers approved by Tenant. 35.5 REPRESENTATION, ETC. Each of the representations, warranties and covenants of Landlord set forth in this Lease will be correct and fully performed. 35.6 LEGAL OPINION. Tenant will have received an opinion of legal counsel for Landlord, in a form and from counsel reasonably acceptable to Tenant, covering the matters set forth on SCHEDULE 35.6. 35.7 TITLE INSURANCE. Tenant will have received a commitment from Chicago Title Company to issue a policy insuring the leasehold estate of Tenant in the Real Property (at Tenant's expense), subject only to liens as approved by Tenant. 35.8 ENVIRONMENTAL AUDIT. Tenant will have received a level one and modified level two environmental study and will have accepted the conclusions and results of the study, which acceptance will be in Tenant's sole discretion. 36 CONDITIONS TO LANDLORD'S OBLIGATIONS. The obligation of Landlord under this Lease are subject to the satisfaction or waiver by Landlord of each of the following conditions on or before the Commencement Date: 36.1 LICENSES. Tenant and Hospital will have received all permits, licenses, orders, certifications and approvals from all federal, state and local governmental and regulatory bodies required to enable Tenant to operate the Hospital under this Lease. 36.2 FIRST MORTGAGE. Tenant, Landlord and the holder of the First Mortgage will have entered into an agreement under which the holder will consent to this Lease and release its security interest in Landlord's working capital, and Tenant and the holder will agree on subordination, attornment and nondisturbance matters. 27 32 36.3 HOSPITAL SUPPORT AGREEMENT. Tenant, Landlord and Palo Verde Hospital District will have entered into a Hospital Support Agreement under which the District will agree to make certain tax revenues available for Capital Improvements and Landlord and the District will form an Advisory Board to the Hospital. 36.4 INSURANCE. Landlord will have obtained a "tail" policy or Tenant will have obtained a claims made policy, insuring Tenant and Landlord against the risks ordinarily insured by standard professional malpractice liability insurance available to the hospitals respect to incidents, errors, omissions and claims which arose, existed or were created before the Commencement Date and with limits and carriers approved by Tenant. 36.5 REPRESENTATIONS, ETC. Each of the representations, warranties and covenants of Tenant set forth in this Lease will be correct and fully performed. 36.6 LEGAL OPINION. Landlord will have received an opinion of legal counsel for Tenant, in a form and from counsel reasonably acceptable to Landlord, covering the matters set forth on Schedule 36.6. 37 ARBITRATION. In the event of any dispute under this Lease, the matter shall be submitted to binding arbitration. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association. If the arbitration is instituted by Landlord, it will be conducted in Multnomah County, Oregon. If the arbitration is instituted by Tenant, it will be conducted in Riverside County, California. The arbitration shall be conducted by a single arbitrator. If the parties are unable to agree on a single arbitrator, the presiding judge of the Multnomah County, Oregon Circuit Court or the Riverside County Superior Court, as applicable, upon request of any party, will designate the arbitrator. The cost of the arbitrator will be shared equally by Landlord and Tenant. Landlord and Tenant will pay their own respective attorneys fees. 38 GENERAL PROVISIONS. 38.1 NONWAIVER. Waiver by either party of strict performance of any provisions of this Lease will not be a waiver of or prejudice the party's right to require strict performance of the same provision in the future or of any other provision. 38.2 EXPENSES.Each party will pay its own expenses in connection with the transactions contemplated by this Lease, except to the extent otherwise expressly indicated. 28 33 38.3 NOTICES. Any notice required or permitted under this Lease will be in writing and will be effective when actually delivered or when deposited in the United States mail as certified mail addressed to the parties at the addresses listed below or to such other address as may be specified from time to time by either of the parties in writing: If to Landlord to: Palo Verde Hospital Association 250 North First Street P.O. Box Z Blythe, CA 92226-0766 Attention: Chairman of the Board With a copy to: Best, Best & Craggier 3750 University Avenue P.O Box 1028 Riverside, CA 92502 Attention: If to Tenant to: Brim Hospitals, Inc. 305 N.E. 102nd Avenue Portland, OR 97220 Attention: Palo Verde Hospital With a copy to: Tonkon, Torp, Galen, Marmaduke & Booth Suite 1600 888 S.W. Fifth Avenue Portland, OR 97204 Attention: Michael M. Morgan 38.4 SURVIVAL. All representations and covenants of the parties in this Lease will survive the Commencement Date. 38.5 SUCCESSORS AND ASSIGNS. This Lease will bind and benefit not only the parties, but their respective successors, heirs and assigns. 38.6 CAPTIONS. Paragraph captions are for convenience only and will not affect the meaning or interpretation of any provision of this Lease. 38.7 GOVERNING LAW. This Lease will be interpreted in accordance with the laws of the state of California. 29 34 38.8 CONSENTS. Any consent or approval required to be obtained under this Lease will not be unreasonably withheld or delayed. BRIM HOSPITALS, INC. PALO VERDE HOSPITAL ASSOCIATION By: /s/ John R. Miller By: /s/ --------------------------- ------------------------------- Name: John R. Miller Name: ------------------------- ----------------------------- Title: President Title: President ------------------------ ---------------------------- 30 EX-10.19 15 LEASE AGREEMENT DATED 5-15-86 1 Exhibit 10.19 LEASE AGREEMENT THIS AGREEMENT made and entered into this 15th day of May, 1986, by and between Fort Morgan Community Hospital Association (the "Hospital Association") and Brim Hospitals Inc., a wholly-owned subsidiary of Brim & Associates, Inc. ("BHI"). WHEREAS, Hospital Association is the owner of a 40-bed acute care facility known as Fort Morgan Community Hospital, Fort Morgan, Colorado (the "Hospital"); and WHEREAS, Hospital Association, Holding Company and BHI have entered into an Operating Agreement of even date herewith whereby BHI will operate the Hospital (the "Operating Agreement"); and WHEREAS, to achieve the goals of the parties hereto as stated in the Operating Agreement, Hospital Association desires to lease to BHI the real property on which the Hospital is located and the furniture, fixtures and equipment located in and on the Hospital (the "Leased Property") and any and all other real property currently owned or acquired during the lease term by the Hospital Association. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, it is hereby agreed as follows: 1. Subject Property. Hospital Association, in consideration of the payment to be made and of the covenants to be kept and performed by BHI hereunder, hereby demises and offers to BHI, and BHI hereby hires and takes from Hospital Association, the real estate located in the Town of Fort Morgan, County of Morgan, State of Colorado, legally described in Exhibit A attached hereto (the "Real Property"), and the improvements constructed thereon that constitute the 40-bed acute care facility commonly known as Fort Morgan Community Hospital (the "Hospital") and all furniture, fixtures, and equipment and other tangible personal property owned and/or leased by Hospital Association and located thereon or therein, also included in subject property any and all real property, equipment, furniture, fixtures, and building improvements acquired by the Hospital Association during the lease term (hereinafter collectively called the "Personal Property"). (Hereinafter the Real Property, the Hospital and Personal Property are collectively referred to as the "Leased Property.") Within ten (10) days after execution of this Agreement, BHI and Hospital Association shall jointly compile two schedules: Schedule A shall identify the Personal Property owned by Hospital Association and the current book value of said property (the "Owned Personal Property"); and Schedule B shall identify the Personal Property leased by Hospital Association, the name of the Lessor, the date of the Lease, the Lease Term and the rental payments owing under -1- 2 the Lease (the "Leased Personal Property"). The Schedules shall be attached hereto as Exhibits B-1 and B-2. BHI does hereby covenant to take all steps necessary to assume any leases entered into by Hospital Association prior to the Commencement Date which relate to the Leased Personal Property and Holding Company shall not be liable for any damage or injury which BHI or any patient of the Hospital may incur as a result of BHI's failure to do so. 2. Term. The term of this Agreement shall commence on June 1, 1986 (the "Commencement Date"), and shall expire on May 31, 2006, unless earlier terminated as provided hereinafter in Sections 5, 13, 14 and 15. Any termination of this Agreement will result in an automatic rescission of the Purchase Agreement. 3. Use. 3.1 BHI shall use and operate the Leased Property as a general acute care facility and, subject to Hospital Association's approval, which approval shall not be unreasonably withheld, for health care and health care related purposes, such as a home health care program, wellness program, long-term care and physician's offices. BHI shall use and operate the Leased Property in compliance with all applicable laws and regulations of the City of Fort Morgan, the State of Colorado, the Medicare and Medicaid Programs, and any other applicable state, federal and local laws, provided that BHI shall have the right to contest the validity or applicability of any such laws and regulations by appropriate legal proceedings upon furnishing Hospital Association with such security as may be reasonably demanded by Hospital Association. 3.2 After the Commencement Date, BHI shall neither use nor permit to be used the Leased Property or any part thereof for any purpose which would cause the cancellation of any insurance policy covering the Hospital or any part thereof, nor shall BHI sell or permit to be kept, used or sold in or about the Leased Property any article which may be prohibited by the standard form of fire insurance policies. BHI shall, at its sole cost, comply with all of the requirements pertaining to the Leased Property of any insurance organization or company necessary for the maintenance of said insurance. 3.3 BHI shall not commit or suffer to be committed any waste on the Leased Property nor shall BHI cause or permit any nuisance thereon. 3.4 BHI shall neither suffer nor permit the Leased Property or any portion thereof to be used in such a manner as (i) might reasonably tend to impair Hospital Association's -2- 3 title thereto, or (ii) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication thereof. 4. Rent. 4.1 As consideration for the use of the Leased Property, BHI shall pay to Hospital Association the amount of One and No/100 Dollars ($1.00) annually (the "Base Rent"). The Base Rent shall be due and owing on the first day of each Lease Year and may be paid to Hospital Association in advance at the address stated in Section 19, below. 4.2 This Lease is intended to be net to Hospital Association. Hospital Association or Holding Company shall not be required to make any payment of any kind with respect to the Leased Property except as may be expressly set forth herein. Accordingly, BHI agrees to pay all additional expenses described herein as they become due and payable. Said additional expenses shall include all real estate taxes, general and special assessments, and other public charges which are assessed, levied, confirmed, or imposed upon the Leased Property, (other than Hospital Association's income taxes, if any) during the Lease Term, all charges for water, electricity, gas, sewerage, waste, trash and garbage disposal, telephone, cable television, and other services furnished to the Leased Property. Forthwith upon payment by BHI of any taxes or assessments required to be paid by it, upon request BHI shall submit to Hospital Association the official receipt or receipts, or photostatic copies thereof, evidencing payment of such taxes or assessments. 4.3 BHI may contest, in its own name or in the name of Hospital Association, with Hospital Association's cooperation which Hospital Association agrees to give, the legality or validity of any such tax or assessment or of any law under which the same shall be imposed. This must be done in good faith, with due diligence, and at BHI's own expense. If BHI does so contest such tax or assessment beyond the time limit for payment thereof by BHI, BHI shall do one of the following: BHI may pay such amount under protest; procure and maintain a stay of all proceedings to enforce collection of such tax or assessment; or deposit with Hospital Association reasonable security for the payment of all contested sums. Once such action is taken by BHI, BHI shall not be considered to be in default on any of the contested additional expense provisions hereof. 4.4 BHI shall have, and Hospital Association hereby irrevocably grants to BHI, the power and authority, at BHI's cost to make, file and prosecute any statement or report or claim for refund which may be required or permitted by law, as -3- 4 the basis of or in connection with the assessment, determination, equalization, reduction or payment of any and every tax or assessment or license or charge which BHI is required to pay or discharge hereunder. 4.5 BHI shall be entitled to pay the Base Rent and any additional expenses, out of all revenues and cash collections received by BHI on Hospital Association's behalf on and after the Commencement Date from any tenants, private pay patients and third-party payors, including Medicare, Medicaid and private insurance. 5. Termination. 5.1 Both Hospital Association and BHI shall be entitled to terminate this Agreement at any time after the first year of the Lease Term for any reason. The termination shall be effective 120 days after receipt of written notice from the terminating party (the "Termination Date"). 5.2 Upon termination by either party or upon expiration of the Lease Term, Hospital Association shall be obligated to purchase any BHI Personal Property, as defined in Section 6.3, below. The purchase price for the BHI Personal Property shall be the depreciated book value of such property as of the Termination Date and shall be paid in cash. [or by execution and delivery to BHI of a promissory note in such amount bearing interest at the Prime Rate as announced by First Interstate Bank of Oregon as it may vary from time to time. Principal and interest shall be amortized and payable over a five-year period with principal and interest payment due monthly commencing one month after the Termination Date.] 5.3 The termination of this Agreement under this Section 5 or Sections 13, 14 and 15 shall result in the rescission of the Purchase Agreement, which rescission shall be in accordance with the terms and conditions set forth in the Operating Agreement. 6. Maintenance, Repair, Alterations and Utilities. Throughout the Lease Term: 6.1 BHI shall, at its own cost, and without expense to Hospital Association, keep and maintain the Leased Property, including all sidewalks, buildings, surface parking lots and improvements of any kind which may be a part thereof, in good, sanitary and neat order, condition and repair, ordinary wear and tear and obsolescence in spite of repair and acts of God excepted. 6.2 BHI shall have the right to make alterations, additions and improvements to the Leased Property provided that -4- 5 (a) such work does not adversely affect the structural integrity of the Hospital or diminish the value thereof, (b) any such work is performed in a good and workmanlike manner and in conformance with all applicable building codes, and (c) any such work that is a capital requirement, as defined below in Section 6.7, shall have been submitted to Hospital Association. 6.2.1 BHI shall have the right to replace the existing Personal Property provided that any such purchase that is a capital requirement shall have been submitted to Holding Company and Hospital Association for approval. 6.2.2 BHI shall also have the right to acquire any additional Personal Property which in its judgment is needed to meet the needs of the patients of the Hospital (the "BHI Personal Property"), provided that any such acquisition that is a capital requirement shall have been submitted to Hospital Association for approval. 6.3 BHI shall submit on an annual basis all planned capital requirements to Holding Company for its review and approval. 6.4 In the event that BHI and Hospital Association agree to make substantial alterations, additions or improvements to the Hospital, Hospital Association agrees to undertake reasonable efforts in securing the necessary capital financing through reasonable and available means. 6.5 The success of Hospital Association in securing capital financing shall result in an additional expense payable by BHI under the Operating Agreement. The additional expense shall be equal to the amount which Hospital Association is required to pay annually to amortize the debt secured by Hospital Association. 6.6 All such debt financing shall be in the name of Hospital Association, although BHI shall provide Hospital Association with whatever assistance it may need in connection therewith. Upon termination of this Agreement, Hospital Association will be solely responsible for the continued satisfaction of any such debt, unless the necessary financing was provided by BHI in which case Hospital Association shall reimburse BHI for the cost of all such improvements at their then depreciated book value. 6.7 As used in this Section 6, capital requirement shall mean alterations, additions, improvements, equipment or personal property with a cost of over $5,000.00 and three years or more life expectancy. -5- 6 6.8 BHI shall also maintain the Hospital grounds in a good and sightly appearance, including regular mowing, pruning, fertilizing, and other appropriate care of all grass, plants, and trees. 7. Liens Against the Property. 7.1 Aside from the permitted encumbrances listed in Exhibit B, BHI will not permit the Leased Property to become subject to any lien, charge, or encumbrance. BHI shall maintain the Leased Property free from all orders, notices, and violations filed or entered by any public or quasi-public authorities. Notwithstanding the foregoing, BHI may contest any such liens, charges, encumbrances, orders, notices or violations. This must be done in good faith, and with due diligence. 7.2 Should a judgment on any lien, charge, encumbrance, order, notice or violation by rendered against the Leased Property, and should BHI fail to discharge such judgment or take action to protest such judgment, Hospital Association shall have the right but not the obligation to discharge said judgment. If Hospital Association exercises that option, any amount paid by Hospital Association shall be due from BHI as additional rent. Such additional rent shall be due and payable immediately upon BHI's receipt of notice from Hospital Association that the expense was incurred. 8. Indemnification. 8.1 BHI hereby agrees to indemnify and to hold Hospital Association and Holding Company harmless from and against any and all claims and demands for injury or death to persons and damage to property occurring on the Leased Property during the Lease Term, and will defend Hospital Association and Holding Company from any claim of liability on account thereof; provided, however, that BHI shall have no obligation with respect to any claims resulting from the negligent or willful misconduct of Hospital Association or Holding Company or their officers, directors, agents or employees, or any claims arising prior to the Commencement Date which relate to the ownership of the Leased Property or the operation of the Hospital. 8.2 Hospital Association hereby agrees to indemnify and to hold BHI harmless from and against any and all claims and demands for injury or death to persons and damage to property occurring prior to the Commencement Date, and will defend BHI from any claim of liability on account thereof. In addition, Hospital Association agrees to indemnify and to hold BHI harmless with respect to any claims resulting from the negligent or willful misconduct of Hospital Association or Holding Company or their officers, directors, agents or -6- 7 employees, and any claims which relate to the ownership of the Leased Property arising prior to the Commencement Date or during the Lease Term. 9. Quiet Enjoyment. Hospital Association warrants that BHI upon paying the Base Rent and the additional expenses as provided for in this Agreement and upon performing all other requirements hereof, shall quietly have, hold, and enjoy the Leased Property during the Lease Term. Notwithstanding the foregoing, Hospital Association shall have the right, during normal business hours, to enter upon the Leased Property and to examine and inspect the same, provided said inspection does not interfere with the rendering of patient care at the Hospital. 10. Insurance. 10.1 Throughout the Lease Term BHI shall, at its expense, maintain the following insurance: a) Insurance against loss or damage by fire and such other risks as may be included in the broadest form of extended coverage from time to time; and b) Insurance against loss or damage by explosion of steam boilers, pressure vessels, or any similar apparatus now or hereafter installed on the Leased Property in an amount not less than 90% of the insurable value of the Leased Property from time to time; and c) Insurance against claims for personal injury and property damage occurring on the Leased Property under a comprehensive professional and general hospital liability policy with limits of not less than One Million Dollars ($1,000,000.00) per claim/incident, Five Million Dollars ($5,000,000.00) in the aggregate and One Million Dollars ($1,000,000.00) for property damage arising out of any single occurrence. d) Loss of rents under a rental value insurance policy covering risk of loss during the first six months due to the occurrence of any of the hazards described in a) or b) in an amount sufficient to prevent Hospital Association or Holding Company from becoming a co-insurer. e) Such other hazards and in such amounts as may be customary for comparable properties in the area and is of the type available from reputable insurance companies. 10.2 The term "insurable value" of improvements as used herein, shall mean the actual replacement cost thereof from time to time, less exclusions provided in the normal fire insurance policy. In the event either party believes that the -7- 8 insurable value (the then replacement cost less exclusions) has increased or decreased, it shall have the right, but only, except as provided below, at intervals of not less than five years to have such insurable value re-determined by the fire insurance company which is then carrying the largest amount of fire insurance carried on the Leased Property, hereinafter referred to as an "impartial appraiser". The party desiring to have the insurable value so re-determined shall forthwith, on receipt of such determination by such impartial appraiser, give written notice thereof to the other party hereto. The determination of such impartial appraiser shall be final and binding on the parties hereto, and BHI shall forthwith increase, or may decrease, the amount of the insurance carried pursuant to this Section 10, as the case may be, to the amount so determined by the impartial appraiser. The party desiring the redetermination shall pay the fee, if any, of the impartial appraiser. If, during any such five-year period BHI or Hospital Association shall have made improvements to the Leased Property, Hospital Association may at its own cost have such insurance value re-determined at any time after such improvements are made, regardless of when the insurable value was last determined. 10.3 All insurance policies carried by either party covering the Leased Property, including without limitation thereto, contents, fire and casualty insurance, shall expressly waive any right of subrogation on the part of the insurer against the other party. The parties hereto agree that their policies will include such waiver clause or endorsement so long as the same are obtainable without extra cost, and in the event of such an extra charge, the other party, at its election, may pay the same but shall not be obligated to do so. 10.4 To the extent that either Hospital Association or BHI may have claims against the other for fire or casualty damage to the Leased Property (including business interruption caused thereby), which claims are covered by insurance payable to and protecting the claiming party, the claiming party hereby agrees to exhaust all claims under such insurance before asserting any claims against the other party. The foregoing shall apply to claims for damage whether such damage is caused, wholly or partially, by the negligence or other fault of the other party or its agent, employees, subtenants, licensees, or assignees. 10.5 All of the policies of insurance referred to in this Section shall name Hospital Association as an additional insured, shall be written in form satisfactory to Hospital Association and by insurance companies satisfactory to Hospital Association. Hospital Association agrees that it will not unreasonably withhold its approval as to the form of or to the insurance companies selected by BHI. BHI shall pay all of the premiums therefor, and deliver such policies or certificates -8- 9 thereof to Hospital Association prior to their effective date (and, with respect to any renewal policy), at least five days prior to the expiration of the existing policy, and in the event of the failure of BHI either to effect such insurance in the names herein called for, to pay the premiums therefor, or to deliver such policies or certificates thereof to Hospital Association at the time required, Hospital Association shall be entitled, but shall have no obligation, to effect such insurance and pay the premiums therefor, which premiums shall be repayable to Hospital Association upon written demand therefor, and failure to repay the same shall carry with it the same consequence as failure to pay any installment of Base Rent or additional expenses. Each insurer mentioned in this Section shall agree, by endorsement on the policy or policies issued by it, or by independent instrument furnished to Hospital Association, that it will give to Hospital Association ten days written notice before the policy or policies in question shall be altered or cancelled. 10.6 In the event that either party shall at any time deem the limits of the personal injury or property damage public liability insurance then carried to be either excessive or insufficient, the parties shall endeavor to agree on the proper and reasonable limits for such insurance to be carried; and such insurance shall thereafter be carried with the limits thus agreed on until further change pursuant to the provisions of this Section. If the parties shall be unable to agree thereon, the proper and reasonable limits for such insurance to be carried shall be determined by an impartial third party selected by the parties. 10.7 Notwithstanding anything to the contrary contained in this Section, BHI's obligations to carry the insurance provided for herein may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by BHI or its parent, provided, however, that the coverage afforded Hospital Association will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Section 10 are otherwise satisfied. 11. Damage and Destruction. 11.1 All proceeds payable by reason of any physical loss of any of the improvements comprising the Leased Property and insured under any policies of insurance required by this Lease shall be held in trust by BHI and subject to Section 11.2 shall be available for the reconstruction or repair, as the case may be, of any damage to or destruction of the Property, the Hospital and the Personal Property and shall be paid out by BHI -9- 10 from time to time for the reasonable cost of such work. Any excess of money received from insurance remaining with BHI after the restoration or reconstruction of the Leased Property shall be retained by BHI free and clear upon completion or restoration or construction or upon the expiration of thirty days after Hospital Association's notice as provided for in Section 11.3, as the case may be. All salvage resulting from any such loss covered by insurance shall belong to Hospital Association. 11.2 In the event any improvements comprising the Leased Property are damaged by peril covered by insurance, BHI shall commence to rebuild the same within sixty days after the proceeds of any insurance become available unless: 11.2.1 Repair or reconstruction of the damage cannot be made under the existing laws, ordinances, statutes or regulations of any governmental authority applicable thereto, in which event there shall be no obligation to rebuild, and all such insurance proceeds shall be remitted to Hospital Association. 11.2.2 The damage or loss occurs within three years of the end of the Lease Term and Hospital Association elects not to rebuild, in which case all insurance proceeds shall be remitted to Hospital Association; 11.2.3 The damage is thirty percent (30%) or more of the sum of (i) the then current reconstruction cost of the Real Property and the Hospital, and (ii) the replacement cost of all Personal Property as determined by an insurance survey and Hospital Association elects not to rebuild, in which case all insurance proceeds shall be remitted to Hospital Association; 11.2.4 The loss renders the Hospital unsuitable for use as an acute care facility and Hospital Association elects not to rebuild, in which case all insurance proceeds shall be remitted to Hospital Association. 11.3 The Hospital Association's election to rebuild or not (pursuant to Sections 11.2.2, 11.2.3 or 11.2.4 above) shall be by written notice to BHI within sixty days after the damage occurs and shall result in an automatic termination of this Lease upon BHI's receipt of said notice. Hospital Association's inability to rebuild under Section 11.2.1 shall also trigger a termination of this Lease effective sixty days after the damage occurs. 11.4 In the event any loss occurs which renders the Hospital unsuitable for use and there is not insurance coverage with respect to such loss, Hospital Association may, at its election, either terminate this Lease or elect to rebuild or -10- 11 repair the damage so incurred provided that unless Hospital Association notifies BHI in writing sixty days after such damage as to which election it makes, it shall be deemed to have elected to rebuild or repair. Any such replacement or repairs shall be commenced within sixty days of the date of election by Hospital Association, but not later than one hundred twenty days after the loss. In the event Hospital Association does not elect to rebuild or repair, this Lease shall automatically terminate as provided in Section 11.3, above. 11.5 For the purposes of this Section 11, the Hospital shall be deemed to have been rendered unsuitable for use as an acute care facility if in the good faith judgment of BHI, reasonably exercised, after any such loss the Hospital cannot be operated on a commercial practicable basis as an acute care facility of the type and quality existing and licensed immediately prior to such loss taking into account, among other relevant factors, the number of usable beds affected by such loss. 11.6 This Lease shall remain in full force and effect and BHI's obligation to make rental payments and to pay all other charges required by this Lease shall remain in full force and effect during the period of repair and/or reconstruction. 12. Condemnation 12.1 If, during the term of this Lease, the whole or any portion of the Leased Property is taken or condemned in fee for a public or quasi-public use, then BHI shall have the option to terminate this Lease. 12.2 Damages for Taking. In the event of either a partial or a total taking or condemnation, all damages awarded in connection with the taking of the Property, the Hospital or the Personal Property shall vest in Hospital Association, and any damages awarded in connection with the taking of the leasehold estate, or BHI Personal Property shall vest in BHI. 13. Default by BHI. In the event BHI shall fail to observe, perform or comply with any of the terms, covenants, agreements or conditions contained in this Lease and such failure shall continue for thirty days after Hospital Association has given BHI notice of such failure, Hospital Association shall have the right to terminate this Lease effective sixty days thereafter and to take immediate possession of the Leased Property; BHI shall be obligated to pay all rent owing to the date of termination; and Hospital Association shall be obligated to acquire any BHI Personal Property as provided in Section 5.2. Thereafter, neither party shall have any further rights or obligations hereunder. -11- 12 Notwithstanding the foregoing, if BHI has promptly commenced and diligently pursued remedial action within said thirty-day period, said thirty day period shall be extended for the minimum time reasonably required for the completion of BHI's remedial action. 14. Default by Hospital Association. In the event (i) Hospital Association defaults in the performance of or compliance with any of its obligations hereunder for a period of thirty days after written notice thereof from BHI except for any default not susceptible of being cured within thirty days were Hospital Association is proceeding with reasonable diligence to cure the same or (ii) laws or regulations are enacted or promulgated which, in the reasonable opinion of BHI, severely restrict or increase the cost of operating the Hospital for the purpose contemplated hereby, BHI shall have the right to terminate this Lease effective sixty days thereafter, subject to BHI's obligation to pay any rent or additional expenses owing to the date of termination and to Hospital Association obligations under Section 5.2 15. Termination by a Third Party. In the event this Lease is terminated by a third party over which neither BHI nor Hospital Association has any control, both BHI and Hospital Association shall be entitled to receive whatever compensation is owing to them under this Lease to the date of termination. BHI and Hospital Association agree in the event of such a termination to work together toward an orderly lease termination. 16. Assumption of Contracts. In the event that this Agreement is terminated by either party or not renewed at the expiration of the Lease Term, Hospital Association will assume liability for the performance, from and after said termination/expiration date, of any contracts relating to the Leased Property entered into or assumed by BHI which extend past the term of this Agreement. 17. Assignment. BHI may not assign its rights or obligations under this Agreement or sublet the Property or any part thereof to any unrelated organization without obtaining the prior written consent of Hospital Association. Such consent shall not be unreasonably withheld. BHI may assign to a related party upon prior written notice to the Hospital Association. In the event a party other than Hospital Association becomes the owner of the Hospital's assets, the new owner shall take title subject to Hospital Association's obligations and BHI's rights hereunder including, but not limited to, BHI's right of first refusal referred to in Section 22 below. -12- 13 18. Arbitration. 18.1 In the event there are any matters affecting the interpretation of this Agreement that cannot be resolved by mutual agreement of the parties, either party shall have the right to demand that such disputed matter be submitted to arbitration by a Board of Arbitrators composed of three members. Each party shall appoint one arbitrator and the two so appointed shall select a third. Their decision on any disputed matter shall be final. Either party demanding arbitration shall notify the other in writing of its demand for arbitration specifying the matter to be submitted to arbitration and the name of the arbitrator selected by it. 18.2 Upon receipt of such written notice, the other party shall have ten days within which to select its arbitrator and to notify the other party in writing of such selection and the two so selected shall have fifteen days in which to select a third arbitrator. In the event the third arbitrator is not selected within said fifteen days, then such third arbitrator shall be appointed by the Circuit Court with jurisdiction over Morgan County upon application by either party after at least five days' written notice to the other party of the hearing of such application. 18.3 The appointees to the Arbitration Board shall have sufficient knowledge of hospital matters so that reasonable judgments can be made. No arbitrator shall have the right to change or alter the terms of this Agreement. The provisions of the Uniform Arbitration Act shall apply unless expressly in conflict with any provision in this Agreement. 18.4 All expenses incurred in connection with the arbitration shall be shared equally by the parties to the dispute. 19. Notices. Any notice permitted or required hereunder shall be in writing and shall be deemed received three business days after the date on which it is deposited in the United States mail, certified or registered mail, postage prepaid and addressed as follows: If to Hospital Association: Fort Morgan Community Hospital Association 1000 Lincoln Street Fort Morgan, Colorado 80701 Attn: President, Fort Morgan Community Hospital Association -13- 14 If to BHI: c/o Brim & Associates, Inc. 177 NE 102 Avenue Portland, Oregon 97220 Attn: Doug Atkinson Such addresses may be changed by either party by ten days prior written notice to the other party. 20. Prior Agreements. Hospital Association warrants that, to the best of its knowledge, this Agreement does not breach or conflict with any commitments or responsibilities under any prior agreements to which Hospital Association may be a party or any law by which Hospital Association may be bound. Hospital Association warrants that it has full authority to permit the use of the Leased Property by BHI under the terms and conditions set out in this Agreement. BHI shall be held harmless from any claims, liabilities, and expenses arising from agreements to which Hospital Association is or was a party on or before the Commencement Date, except to the extent that such agreements are assumed by BHI in writing. 21. Contractual Obligations. To the best knowledge of Hospital Association, attached hereto as Exhibit C is a Schedule of Material Contracts to which Hospital Association is party or is bound or will be bound as of the Commencement Date, and which affect or relate to the Leased Property The Contracts listed are intended to include: a) All leases, rental agreements and other contracts affecting the ownership or leasing of, title to, use of, or any interest in the Leased Property; and b) Any contract or commitment, sales order or purchase order, whether in the ordinary course of business or not, which involves future payments, performance of services or delivery of goods and/or materials, to or by Hospital Association of an amount or value in excess of Five Thousand Dollars ($5,000.00). Except as may be stated in Exhibit C, all such Material Contracts are to the best knowledge of Hospital Association valid and binding obligations of the parties thereto in accordance with their respective terms and there have been no unlisted amendments or modifications to any Material Contract. Furthermore, Hospital Association will endeavor to disclose and explain any additional nonmaterial contracts or agreements which impose any duty, obligation, or liability upon the Hospital Association. To the extent required by law, BHI agrees to perform, discharge or otherwise satisfy the legal responsibility of Hospital Association required after the Closing Date in and under all of the listed current Material Contracts and Agreements which are assumed by BHI pursuant to -14- 15 this Section 21. Notwithstanding the foregoing, BHI shall retain the right to terminate, modify, and/or renegotiate said contracts, provided Hospital Association incurs no liability as a result thereof. Hospital Association agrees, upon the request of BHI,, to exercise any rights or options which may belong to the Hospital Association, which BHI may by contract be prevented from exercising, provided any cost associated with such exercise will be borne by BHI. 22. Right of First Refusal. 22.1 If at any time during the Lease Term Hospital Association should offer to sell or receive an offer to buy all of the Leased Property, BHI shall have a right of first refusal to acquire the same. Hospital Association shall give BHI written notice of its intention to so sell, transfer or convey and BHI shall have the option, exercisable within thirty days after receipt of such not ice, to purchase the Leased Property on the same terms as submitted by offeror to Hospital Association or as offered by Hospital Association in such notice. 22.2 In the event BHI exercises its option under this Section, closing of BHI's purchase shall occur within ninety days thereafter at the offices of Hospital Association's attorneys. At closing, Hospital Association shall execute and deliver such instruments as reasonably may be appropriate to assign and convey the Leased Property to BHI. Hospital Association shall cause all holders of encumbrances on the Leased Property to release their encumbrances at closing unless BHI elects to assume some or all of the same in which case the principal balances of the assumed encumbrances shall be offset against the cash due at closing. The purchase price for the Leased Property shall be paid to Hospital Association at closing by cashiers check or by wire transfer to Hospital Association's bank account. 22.2.1 In the event the sale of the Leased Property to BHI requires the approval of any governmental agency, the sale shall be contingent upon the granting of such approval. Hospital Association and BHI shall execute and deliver to any such governmental agency such instruments as may be required by the' agency in connection with the approval of the sale. If such approval is not secured by the date of closing, the closing shall be postponed to the first day of the first month after the month in which such approval is secured. Pending such approval, the terms of this Lease shall apply to the extent practicable. If such approval is denied, the Lease shall remain in effect in accordance with its terms; provided, however, that Hospital Association shall thereafter be entitled to sell the Leased Property to a third party, if such sale is closed within one hundred eighty days after the governmental agency's denial of approval of the sale to BHI. -15- 16 22.2.2 If title to the Leased Property is transferred to a corporation which is affiliated with Hospital Association and by virtue of a subsequent change in the beneficial ownership of said affiliate, the affiliate ceases to be affiliated with Hospital Association, BHI shall have the option to purchase the Leased Property for their Fair Market Value or the pro rata value paid by the purchaser of the affiliate, whichever is less, in the manner prescribed in Section 22.2.1. 22.2.3 This Lease shall terminate upon closing of the sale of the Leased Property to BHI. 23. Hospital Association's Right to Perform BHI's Covenants. 23.1.1 If BHI defaults in the making of any of the payments, or the performance of any of the obligations provided for in this Lease, Hospital Association may, at its option and on behalf of BHI, make any such payments or perform any such obligations. 23.1.2 Before exercising that option, however, Hospital Association must give BHI written notice of BHI's default, and of Hospital Association's intention to correct that default. If after thirty days BHI has not corrected such default, Hospital Association may exercise its rights under this Section 23. 23.1.3 In the event Hospital Association performs any obligation on BHI's behalf, BHI shall reimburse Hospital Association for any amounts reasonably paid or expended. This reimbursement shall be due and payable immediately after BHI's receipt of notice from Hospital Association that the expense was incurred. Hospital Association shall not be held liable or in any way responsible for any loss, inconvenience, annoyance or damage resulting to BHI on account of such performance by Hospital Association, unless Hospital Association is found to have been negligent in its performance. All amounts payable to BHI to Hospital Association under any of the provisions of this Lease, if not paid when the same become due as in this Lease provided, shall bear interest from the date they become due until paid at the prime rate of interest then in effect at First Interstate Bank of Portland, Oregon. In the event First Interstate of Portland, Oregon ceases or fails to publish or announce a prime rate, regardless of the reason therefor, interest shall accrue at the prime rate announced by the bank designated by Hospital Association, provided such bank is among the top twenty-five banks in the United States in terms of deposits. -16- 17 24. Miscellaneous. 24.1 This Agreement and the Purchase Agreement constitute the entire agreement between the parties with respect to the Leased Property and the operation of the Hospital. No subsequent alteration, amendment, change or addition to this Agreement shall be binding upon Hospital Association or BHI unless reduced to writing and executed by the parties. 24.2 This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 24.3 If any term, covenant or condition of this Agreement, or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant or condition to other persons and circumstances shall be valid and enforceable to the fullest extent permitted by law. 24.4 Subject to the limitations on assignment set forth above, the terms, covenants and conditions hereof shall be binding upon and shall inure to the benefit of the parties hereto and their respective legal representatives, successors and assigns. IN WITNESS WHEREOF, Hospital Association and BHI have caused this Lease Agreement to be duly executed as of the date first above written: FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION By: /s/ Ann Marron -------------------------------- Its: President ------------------------------- By: -------------------------------- Its: ------------------------------- BRIM HOSPITALS, INC. By: /s/ -------------------------------- Its: AUTHORIZED REPRESENTATIVE ------------------------------- By: -------------------------------- Its: ------------------------------- -17- 18 STATE OF COLORADO ) ) ss. COUNTY OF ) The foregoing instrument was acknowledged before me this 15th day of May, 1986, by Ann Marron and ______________________, respectively the President and ___________________________of Fort Morgan Community Hospital Association on behalf of the company. /s/ Gale Karas -------------------------------- Notary Public My Commission Expires: 4/20/89 STATE OF OREGON ) ) ss. COUNTY OF ) The foregoing instrument was acknowledged before me this 15th day of May, 1986, by Bill Wilber and ____________________________, respectively the Vice President and Representative of Brim Hospitals, Inc. on behalf of the corporation. /s/ Antoinette J. Grabler -------------------------------- Notary Public My Commission Expires: 01/09/88 -18- 19 AMENDMENT TO LEASE AGREEMENT This Amendment is made and entered into this 26th day of August, 1986, by and between Fort Morgan Community Hospital Association (the "Hospital Association") and Brim Hospitals, Inc. ("BHI"). WHEREAS, the parties entered into a Lease Agreement dated May 15, 1986 (the "Lease") whereby BHI agreed to lease certain real property, improvements located thereon and personal property located therein that constitute the Fort Morgan Community Hospital, Fort Morgan, Colorado (the "Hospital"); and WHEREAS, The parties desire to amend the definition of the Leased Property as presently set forth in the Lease; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, it is hereby agreed as follows: 1. The parties hereby agree to amend Paragraph 1 of the Lease so that the description of the Leased Property shall exclude the following assets currently leased by the Hospital Association: 1. House located at 1117 Grant, Fort Morgan, Colorado; 2. Dupont Chemical Analyzer; and 3. Specialty Physician Clinic Building, Fort Moran, Colorado. 2. The parties shall negotiate and execute separate agreements for the leasehold rights to each of the above-named assets. 3. This Amendment shall be governed by and construed in accordance with the laws of the State of Colorado. 4. Except as hereby amended, all other terms and conditions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date first above written. FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION BY: /s/ Ann L. Marron ------------------------------ ITS: President ----------------------------- BRIM HOSPITALS, INC. BY: /s/ ------------------------------ ITS: Vice President ----------------------------- Authorized Representative 20 Amendment to Lease Agreement This amendment is made and entered into this 16th day of February 1987 by and between Fort Morgan Community Hospital Association (the "Hospital Association") and Brim Hospital, Inc. ("BHI"). Whereas, the parties entered into a lease agreement dated May 15, 1986 (the "Lease") whereby these capital requirement shall mean alteration, addition, improvement, equipment or personal property with a cost of over $5,000 and three years or more of life expectancy, shall have been submitted to the Hospitals Association and Holding Company for approval. Whereas, the parties desire to amend the amount of capital requirement to be approved as presently set forth in the lease. Now, therefore, it is hereby agreed as follows: 1. The parties hereby agree to amended paragraph 6.7 of the lease so that the amount of capital requirements shall read: 6.7 As used in the Section 6, capital requirements shall mean alterations, additions, improvement equipment or personal property with a cost of over $25,000 and three years or more of life expectancy. 2. This amendment shall be governed by and conserved in accordance with the laws of the State of Colorado. 3. Except as hereby amended, all other terms and conditions of the lease shall remain in full force and effect. In witness hereof, the parties have caused this amendment to be duly executed as of the date first above written. Fort Morgan Community Hospital Association by: /s/ John C. Clatworthy, President --------------------------------------- John C. Clatworthy it's: President -------------------------------------- Brim Hospitals, Inc. by: /s/ William N. Wilber ---------------------------------------- William N. Wilber it's: Vice President, Authorized Representative ------------------------------------------- 21 AMENDMENT TO LEASE AGREEMENT This Amendment is made and entered into this 26th day of August, 1986, by and between Fort Morgan Community Hospital Association (the "Hospital Association") and Brim Hospitals, Inc. ("BHI"). WHEREAS, the parties entered into a Lease Agreement dated May 15, 1986 (the "Lease") whereby BHI agreed to lease certain real property, improvements located thereon and personal property located therein that constitute the Fort Morgan Community Hospital, Fort Morgan, Colorado (the "Hospital"); and WHEREAS, the parties desire to amend the definition of the Leased Property as presently set forth in the Lease; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, it is hereby agreed as follows: 1. The parties hereby agree to amend Paragraph 1 of the Lease so that the description of the Leased Property shall exclude the following assets currently lease by the Hospital Association: 1. House located at 1117 Grant, Fort Morgan, Colorado; 2. Dupont Chemical Analyzer; and 3. Specialty Physician Clinic Building, Fort Morgan, Colorado. 2. The parties shall negotiate and execute separate agreements for the leasehold rights to each of the above-named assets. 3. This Amendment shall be governed by and construed in accordance with the laws of the State of Colorado. 4. Except as hereby amended, all other terms and conditions of the Lease shall remain in full force and effect. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date first above written. FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION BY: /s/ Ann L. Marron -------------------------- ITS: President -------------------------- BRIM HOSPITALS, INC. BY: /s/ William N. Wilber -------------------------- ITS: VICE PRESIDENT -------------------------- AUTHORIZED REPRESENTATIVE 22 ADDENDUM TO FORT MORGAN OPERATING AGREEMENT DATED MAY 15, 1986 This Addendum is made and entered into this 26th day of August, 1986, by and between Fort Morgan Community Hospital Holding Company (the "Holding Company"), Fort Morgan Community Hospital Association (the "Hospital Association"), Brim Hospitals, Inc. ("BHI") and Brim & Associates, Inc. ("Brim"). WHEREAS, the parties hereto entered in an Operating Agreement dated May 15, 1985 (the "Agreement") whereby BHI assumed all of Hospital Association's and Holding Company's rights and obligations with respect to operating expenses and accounts receivable of Fort Morgan Community Hospital, Fort Morgan, Colorado (the "Hospital"); and WHEREAS, pursuant to the terms of the Agreement, Hospital Association was obligated to bring the working capital balance to a positive amount of $1,000.00 within (thirty) 30 days of completion of a working capital audit, which audit was conducted on May 31, 1986; and WHEREAS, Hospital Association desires to extend payment of such obligation over a period of twelve (12) months and BHI is willing to permit such extension of payment; NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, it is hereby agreed as follows: 1. BHI and Brim hereby consent to the extension of time for payment of the amount needed to bring the working capital balance to a positive amount of $1,000.00 for a period of twelve (12) months commencing June 30, 1986. 2. Hospital Association hereby agrees to pay to BHI the amount necessary to bring the working capital balance to a positive amount of $1,000.00 by paying such sum in twelve (12) equal monthly installments commencing June 30, 1986. 3. The amount owed to BHI by Hospital Association shall be as determined by the working capital audit conducted by Touche Ross on May 31, 1986. 4. This Addendum shall be governed by and construed in accordance with the laws of the State of Colorado. 5. Except as hereby amended, all other terms and conditions of the Agreement shall remain in full force and effect. 23 IN WITNESS WHEREOF, the parties have caused this Addendum to be duly executed as of the date first above written. FORT MORGAN COMMUNITY HOSPITAL HOLDING COMPANY BY: /s/ Susan ------------------------- ITS: President ------------------------- FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION BY: /s/ Ann E. Morris ------------------------- ITS: President ------------------------- BRIM HOSPITALS, INC. BY: /s/ ------------------------- ITS: Authorized Representative ------------------------- BRIM & ASSOCIATES, INC. BY: /s/ ------------------------- ITS: Vice President Authorized Representative ------------------------- 24 AMENDMENT TO LEASE AGREEMENT AND TERMINATION OF OPERATING AGREEMENT THIS AGREEMENT is made and entered into this 23rd day of May, 1994 by and between Fort Morgan Community Hospital Association (the "Hospital Association") and Brim Hospitals, Inc. ("BHI"). RECITALS A. The Hospital Association is the owner of that 40 bed acute care facility known as Colorado Plains Medical Center, Fort Morgan, Colorado (the "Hospital"). B. By Lease Agreement dated May 15, 1986, as amended by Amendments dated August 26, 1986 and February 16, 1987 (collectively, the "Lease"), the Hospital Association leased the Hospital to BHI. C. Concurrently with the execution of the lease, BHI and the Hospital Association, along with Fort Morgan Community Hospital Holding Company (the "Holding Company") and Brim & Associates, Inc. (now known as Brim, Inc.) entered into an Operating Agreement, as amended by Addendum dated August 26, 1986 (the "Operating Agreement"). D. Since the execution of the Operating Agreement the Holding Company has been dissolved and the material obligations of BHI and Brim and the Hospital Association provided for therein have been performed. E. BHI and the Hospital Association have agreed to terminate the Operating Agreement and to incorporate into the Lease any provisions thereof with continuing applicability to the relationship between the parties. F. BHI and the Hospital Association have further agreed to amend the Lease to reflect certain changes in the rights and obligations of the parties thereunder resulting from a proposed remodeling and expansion of the Hospital which will be financed in part through an increase in the rent due under the Lease. G. BHI and the Hospital Association want to document the terms and conditions under which the Operating Agreement will be terminated and the Lease will be amended. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT 1. TERMINATION OF OPERATING AGREEMENT. Effective as of May 1, 1994 (the "Effective Date") the Operating Agreement shall be terminated and the parties shall have no further rights or obligations thereunder. 2. AMENDMENT OF LEASE. As of the Effective Date, the Lease is hereby amended as follows: 2.1 Section 2 is hereby deleted in its entirety and the following inserted instead: The initial term of this Agreement (the "Initial Term") shall commence on May 1, 1986 (the "Commencement Date") and shall expire on April 30, 1994. This Agreement shall automatically renew at the end of the Initial Term for a renewal term (the "First Renewal Term") of 20 years commencing on May 1, 1994 and terminating on April 30, 2014. BHI shall have the right to extend the term of the Agreement beyond the First Renewal Term for one additional renewal term of five (5) years (the "Additional Renewal Term") by written notice to the Hospital Association delivered no less than sixty (60) days prior to the end of the First Renewal Term. Nothing herein shall be deemed to 25 preclude the termination of this Agreement prior to the end of the First Renewal Term or any Additional Renewal Term in accordance with the provisions of Sections 13, 14, and 15 of this Agreement. In the event BHI exercises its rights with respect to the Additional Renewal Term, prior to the expiration thereof, BHI and Hospital Association shall negotiate in good faith with respect to the extension of the term of the Lease for an additional five year renewal term (the "Second Additional Renewal Term") which shall be effective upon the expiration of the Additional Renewal Term and which shall be on such terms and conditions as may be mutually acceptable to the parties. 2.2. Section 4.1 is hereby deleted in its entirety and the following inserted instead: 4.1 As consideration of the use of the Leased Property, BHI shall pay to the Hospital Association the following amounts: (i) During the Initial Term an amount equal to One and no/100 Dollars ($1.00) annually, which shall be due and owing on the first day of each Lease Year of the Initial Term and may be paid to the Hospital Association in advance at the address stated in Section 19. (ii) During the First Renewal Term, an amount equal to the sum of (i) the amount specified in Attachment I plus (ii) all principal and interest due on the New Debt (as defined below). (iii) During the Additional Renewal Terms, an amount equal to the principal and interest due on the New Debt. For purposes of this Section 4.1, the term "New Debt" shall mean that $2,500,000 mortgage to be entered into by the Hospital Association and secured by the Leased Property in connection with the financing of the remodeling and expansion of the Hospital (the "Remodeling") which is described more fully in Attachment II. 2.3 The following is added to Section 4 as new Section 4.6: 4.6 In addition to the rent provided for above, as consideration for the use of the Leased Property, during the first five years of the First Renewal Term, BHI shall contribute to the Hospital Association's designee, the Fort Morgan Community Hospital Foundation, an amount equal to ten (10%) percent of the Hospital's net profits before tax, as determined in accordance with generally accepted accounting principles; provided, however, that BHI's obligations to make such payments shall terminate upon commencement of the construction of the Remodeling and shall not be reinstated until the sixth year of the First Renewal Term, at which time BHI shall contribute to the Hospital Association's designee an amount equal to a percentage of the Hospital's net profits before tax as specified below:
Year in First Renewal Term Percentage of Profits -------------------------- --------------------- or Additional Renewal Terms -------------------------- 6 6% 7 7% 8 8% 9 9% 10-25 10%
2.4 Section 5 is hereby deleted in its entirety. 2.5 Section 6.2.2 is hereby deleted in its entirety and the following inserted instead: 6.2.2 BHI shall use its best efforts to acquire additional Personal Property which in its 26 judgement is needed to meet the needs of the patients of the Hospital and is keeping with the equipment routinely provided by a 40 bed non-urban hospital (the "BHI Personal Property"); provided, however, that any such acquisition that would be treated as a capital expenditure, rather than an operating expense, under generally accepted accounting principles shall be subject to the prior approval of the Hospital Association, which approval shall not be unreasonably withheld. 2.6 Section 6.4 is hereby amended by inserting the following at the end thereof: 6.4 ; provided, however, that in the event the Hospital Association advises BHI that it is unable to secure sufficient funds to finance the cost thereof, BHI may fund the cost thereof and the annual depreciation and interest associated therewith shall be deducted from the net profits before tax of the Hospital and reduce the contributions due to the Association's designee pursuant to Section 4.6 For purposes hereof an alteration, addition or improvement to the Leased Property shall be deemed to be substantial in the event the cost thereof exceeds $100,000. 2.7 The last sentence of Section 22.2 is hereby deleted in its entirety and the following inserted to instead: The purchase price for the Leased Property shall be paid to the Hospital Association at closing by cashiers check or by wire transfer to Hospital Association's bank account; provided, however, that in the event said sale occurs during the First Renewal Term, BHI shall receive a credit against the cash due at closing in an amount equal to $1,000,000. 2.8 The following is added to Section 22 as new Section 22.3: In the event BHI fails to exercise its right of first refusal provided for herein and the Leased Property is sold to a third party, BHI shall be entitled to the first $1,000,000 of the proceeds of the said sale in the event said sale occurs during the First Renewal Term. 2.9 The following are added to Section 24 as new Sections 24.5, 24.6 and 24.7: 24.5 Upon expiration of the Term of this Leases, the following shall occur: 24.5.1 The Hospital Association shall have the option of purchasing from BHI the net working capital of the Hospital. For purposes hereof, the term net working capital shall be defined as the excess of the Hospital's current assets over its current liabilities, all as determined in accordance with generally accepted accounting principles. A preliminary settlement of the amount due hereunder shall be made at the end of the lease term and a final statement shall be made within 60 days thereafter. Payment for the working capital shall be due based on the amount reflected in the preliminary settlement, with an adjusted payment made to or form the Hospital Association when the final settlement is due. BHI shall hire an independent certified public accountant to perform an audit of the working capital and to prepare the preliminary and final settlements. 24.5.2. The Hospital Association shall be required to purchase the BHI Personal Property (as defined in Section 6.2.2). The purchase price for the BHI Personal Property shall be equal to the depreciated book value thereof as of the date on which the Term of this Lease expires. The purchase price shall be payable at the Hospital Association's option in cash or by execution and delivery to BHI of the Hospital Association's promissory note in the face amount thereof, bearing interest at the Prime Rate (as announced by US National Bank of Oregon) as it may vary from time to time, with principal and interest payable in equal monthly installments based on a 5 year amortization schedule and with the first such payment due one month after the date on which the Term of this Lease expires. 24.6 Subject to the authority of Governing Board set forth in Section 24.7, Brim shall have 27 exclusive control of and responsibility for the operations of the Hospital. The day to day operation shall be the responsibility of the executive director and the director of finance of the Hospital (both of whom shall be selected by and shall be employees of Brim). In consideration for its management services,, Brim shall receive an annual management fee in an amount approved by the Governing Board, which approval shall not be unreasonably withheld, which shall be due and payable in equal monthly installments on the fifth day of each month; provided, however that the payment of the management fee shall be subordinate to the payment of the rent due hereunder. 24.7 The Governing Board of the Hospital shall consist of seven members approved by BHI, one of whom shall be an officer or director of the Hospital Association, two of whom shall be employees or officers of BHI, two of whom shall be members of the Fort Morgan Community, one of whom shall be a member of the Fort Morgan Community Hospital Foundation and one of whom shall be a staff physician at the Hospital. In addition, the Hospital's chief of staff shall be an ex officio member of the Governing Board. If any nominated member is not approved by BHI, the Hospital Association shall nominate an alternate member until the full Governing Board has been nominated and approved. The Governing Board shall have the duties and responsibilities with respect to the operations of the Hospital as provided for in Article VII of the BHI By-Laws as previously adopted by the Governing Board. 2.10 Any and all references to the Holding Company shall be deemed to be references to the Hospital Association. 3. REPRESENTATIONS AND WARRANTIES. 3.1 The Hospital Association hereby represents and warrants that it has all necessary corporate power and authority to own the Hospital, to enter into this Agreement and to execute all documents and instruments referred to herein or contemplated hereby and all necessary action has been taken to authorize the individual executing this Agreement to do so. This Agreement has been duly and validly executed and delivered by the Hospital Association and is enforceable against the Hospital Association in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, regulations and authorities affecting the rights or creditors generally and by general principles of equity, and does not require the consent of or approval by any governmental authority. 3.2 In connection with the Remodeling, the Hospital Association acknowledges and agrees that the cost of the Remodeling will be approximately $4,500,000 of which $2,500,000 will be paid through the New Debt, approximately $1 million of which will be paid from rent due under Section 4.1, and the balance of which shall be paid through community contributions. Accordingly, the Hospital Association hereby represents and warrants that it will: 3.2.1 Develop and carry out a community fund raising campaign (the "Campaign") designed to raise not less than $1,000,000 to be applied to the cost of the Remodeling; provided however, that BHI shall provide such assistance with respect to the Campaign as may be reasonably requested by the Hospital Association; 3.2.2 Prior to the successful completion of the Campaign, secure a loan for $1,000,000 (the "Interim Loan"), which Interim Loan shall (i) provide that interest only is due prior to the maturity date thereof and (ii) be due and payable in full from the proceeds of the Campaign; and 3.2.3 For so long as the Interim Loan is outstanding, (i) cause the Fort Morgan Community Hospital Foundation to donate the interest earnings from its Trust Fund to the Hospital Association and (ii) use the same to pay the interest due on the Interim Loan prior to the repayment thereof in accordance with the provisions of Section 3.2.2. 3.3 Brim hereby represents and warrants that it has all necessary corporate power and authority to enter 28 into this Agreement and to execute all documents and instruments referred to herein or contemplated hereby and all necessary action has been taken to authorize the individual executing this Agreement to do so. This Agreement has been duly and validly executed and delivered by Brim and is enforceable against Brim and its affiliates in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws, regulations and authorities affecting the rights of creditors generally and by general principles of equity. 4. GENERAL PROVISIONS 4.1 Each of the parties hereto agrees to execute and deliver any and all further agreements, documents or instruments reasonably necessary to effectuate this Agreement and the transactions referred to herein or contemplated hereby or reasonably requested by the other party to perfect or evidence their rights hereunder. 4.2 All notices to be given by either party to this Agreement to the other party hereto shall be in writing, and shall be given and received in the manner and at the addresses provided for in the lease. 4.3 Each party hereto shall bear its own legal, accounting and other expenses incurred in connection with the preparation and negotiation of this Agreement. 4.4 This Agreement, together with the lease, constitutes the entire understanding between the parties with respect to the subject matter hereof, superseding all negotiations, prior discussion and preliminary agreements. In the event of any conflict between the terms of this Agreement and any of the terms of the asset Agreement, the terms of this Agreement will control. This Agreement may not be modified or amended except in writing signed by the parties hereto. No waiver of any term, provision or condition of this Agreement in any one or more instances, shall be deemed to be or be construed as a further or continuing waiver of any such term, provision or condition of this Agreement. No failure to act shall be construed as a waiver of any term, provision, condition or rights granted hereunder. 4.5 The section headings contained herein are for convenience only and shall not be considered or referred in resolving questions of interpretation. 4.6 This agreement may be executed in one or more counterparts and all such counterparts taken together shall constitute a single original Agreement. 4.7 This agreement shall be governed in accordance with the laws of the state of Colorado. IN WITNESS WHEREOF,the parties hereby execute this agreement as of the day and year first set forth above. BRIM HOSPITALS, INC. BY: /s/ ------------------- ITS: BHI Board Director ------------------- FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION BY: /s/ ------------------- ITS: Chairman, Fort Morgan Community Hospital Association ---------------------------------------------------- 29 ATTACHMENT 1 During the First Renewal Term, BHI shall be obligated to pay rent in an amount equal to One Million and no/100 Dollars ($1,000,000) which shall be payable in full at the commencement of the First Renewal Term (the "Prepaid Rent") and shall be amortized over the First Renewal Term at the rate of $50,000 per lease year. Notwithstanding the foregoing, BHI's obligation to pay the Prepaid rent shall be subjected to the occurrence of all of the following: 1. The Hospital Association shall have secured the New Debt (as defined in Section 4.1 of the lease) on terms acceptable to BHI. 2. The Hospital Association shall have secured the Interim Loan (as defined in Section 3.2.2. of the attached Lease Amendment) and the Hospital Foundation shall have pledged its interest on the Interim Loan (as described more fully in Section 3.2.3 of the attached Lease Amendment). 30 ATTACHMENT 2 The Hospital Association, in conjunction with BHI, shall undertake a $4.5 million expansion/remodeling of the Hospital. This project will include work described in Attachment 2A. 31 ATTACHMENT 2A The Colorado Plains Medical Center Remodel and Expansion will consist of an expansion of the surgery and recovery area, increasing the number of surgeries from two to four, and providing substantial increase in the number of patients than can be treated in the Recovery area. In addition, expansion will also occur in the Emergency Room which will expand to be a full Trauma Center. Radiology will be doubled in size as will the Laboratory. New treatment space will be provided to Cardia Rehab, Respiratory Therapy, and other Ancillary Departments such as Nuclear Medicine, EKG, EEG. On the upper level, a centralized nurse administration area will be remodeled. Rooms currently occupied by ancillary services will be returned to patient rooms. A new administrative area will be completed, which will house Medical Records, the Business Office, Conference rooms, and Office Space. Finally, major circulation corridors will be renovated as well as a relocation of the front entrance from the southern exposure to the northern orientation on the building. Site improvement will include additional paved parking, a new drive-through front entry to both the hospital and Trauma/Emergency Room services unit, and other general exterior improvements. 32 AMENDMENT TO LEASE AGREEMENT THIS AGREEMENT is made and entered into this 8th day of November, 1994 by and between Fort Morgan Community Hospital Association (the "Hospital Association") and Brim Hospitals, Inc. ("BHI"). RECITALS A. The Hospital Association is the owner of that 40 bed acute care facility known as Colorado Plains Medical Center, Fort Morgan, Colorado (the "Hospital"). B. Under the terms of its Certificate of Incorporation, the Association was organized for the purpose of establishing and maintaining a hospital for the care of all person who are suffering from any illness or disability which requires that the patient receive hospital care. C. Prior to 1986 the Association carried out the foregoing purpose through its own operations at the Hospital. However, in 1986 the Hospital was suffering serious financial difficulties and the Association determined that it would further the purpose for which it was organized and best meet the needs of the community served by it if it leased the Hospital to a third party which had the management expertise and financial resources to ensure the continued operation of the Hospital. D. By Lease Agreement dated May 15, 1986, as amended by Amendments dated August 26, 1986 the Hospital Association leased the Hospital to BHI. E. Since entering into the Lease BHI has resolved the financial problems facing the Hospital, has provided a significant amount of charity care to the residents of the community served by the hospital and has invested a significant amount of its resources into the improvement of the physical plant of the Hospital, all of which have served to improve access to and the quality of the care provided to the residents of the community served by the Hospital and to further the tax exempt purpose for which the Association was organized. F. The Lease was amended by amendments dated August 26, 1986 (the "First Amendment"), February 16, 1987 (the "Second Amendment") and May 23, 1994 (the "Third Amendment"). G. The principal purpose of the Third Amendment was to reflect the terms and conditions under which the Hospital would be operated after the further expansion and renovation thereof pursuant to a capital improvement program developed and financed in part by BHI and approved by the Association. 1 33 H. Since the execution of the Third Amendment, BHI and the Association have agreed to make certain other changes to the Lease in order to confirm certain obligations undertaken by BHI in connection with its prior operation of the Hospital. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT 1. Section 3 is hereby amended by adding the following: 3.5. In connection with its operations at the Hospital and in furtherance of the non profit purpose of the Association, BHI shall continue to provide charity care to residents of the community served by the Hospital at levels and in a manner consistent with charity care provided by BHI at the Hospital since the inception of the Lease and BHI shall continue as a participant in the Colorado Indigent Care Program. 2. Section 4.1 (as reflected in the Third Amendment) is hereby amended by inserting the following: (iv) During the First Renewal Term and any Additional Renewal Terms, an amount equal to the principal and interest due on that $1,000,000 loan (the "Interim Loan") entered into between the Hospital Association and Morgan County Federal Savings & Loan Association ("Morgan County") if and to the extent the same has not been paid in full on or before the fifth anniversary of the date thereof or the principal and interest on the Interim Loan is not being paid by the Foundation. 3. Section 4.1 (as reflected in the Third Amendment) is hereby further amended by changing the reference to $2,500,000 in the last paragraph to $3,000,000 and by reflecting that the New Debt shall be provided by Morgan County. 4. Section 4.6 (as reflected in the Third Amendment) is hereby deleted in its entirety and the following inserted instead: 4.6. In addition to the rent provided for above, as consideration for the use of the Leased Property, during the first five years of the First Renewal Term, BHI shall contribute to the Hospital Association's designee, the Fort Morgan Community Hospital Foundation, an amount equal to one (1%) percent of the Hospital's net revenues, as determined in accordance with generally accepted accounting principles; provided however, that BHI's obligation to make such payments shall terminate upon commencement of the construction of the Remodeling and shall not be reinstated until the sixth year of the First Renewal Term, at which time Substitute page to Amendment to Lease Agreement executed Nov. 8, 1994 /s/ John R. Miller ------------------------------ /s/ Debra L. Hays ------------------------------ 2 34 H. Since the execution of the Third Amendment, BHI and the Association have agreed to make certain other changes to the Lease in order to confirm certain obligations undertaken by BHI in connection with its prior operation of the Hospital. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT 1. Section 3 is hereby amended by adding the following: 3.5. In connection with its operations at the Hospital and in furtherance of the non profit purpose of the Association, BHI shall continue to provide charity care to residents of the community served by the Hospital at levels and in a manner consistent with charity care provided by BHI at the Hospital since the inception of the Lease and BHI shall continue as a participant in the Colorado Indigent Care Program. 2. Section 4.1 (as reflected in the Third Amendment) is hereby amended by inserting the following: (iv) During the First Renewal Term and any Additional Renewal Terms, an amount equal to the principal and interest due on that $1,000,000 loan (the "Interim Loan") entered into between the Hospital Association and Morgan County Federal Savings & Loan Association ("Morgan County") if and to the extent the same has not been paid in full on or before the fifth anniversary of the date thereof or the principal and interest on the Interim Loan is not being paid by the Foundation. 3. Section 4.1 (as reflected in the Third Amendment) is hereby further amended by changing the reference to $2,500, 000 in the last paragraph to $3,000,000 and by reflecting that the New Debt shall be provided by Morgan County. 4. Section 4.6 (as reflected in the Third Amendment) is hereby deleted in its entirety and the following inserted instead: 4.6. In addition to the rent provided for above, as consideration for the use of the Leased Property, during the first five years of the First Renewal Term, BHI shall contribute to the Hospital Association or its designee an amount equal to one (1%) percent of the Hospital's net revenues, as determined in accordance with generally accepted accounting principles; provided however, that BHI's obligation to make such payments shall terminate upon commencement of the construction of the Remodeling and shall not be reinstated until the sixth year of the First Renewal Term, at which time 2 35 BHI shall contribute to the Hospital Association or its designee an amount equal to a percentage of the Hospital's net revenues as specified below:
Year in First Renewal Term or Additional Renewal Terms Percentage of Net Revenues - --------------------------- -------------------------- 6 .6% 7 .7% 8 .8% 9 .9% 10-25 1.0%
Any payments made by BHI prior to the date of this Fourth Amendment pursuant to this Section 4.6 as currently written or as previously written shall be deemed to have satisfied the requirements of Section 4.6 as reflected in this Fourth Amendment. 5. Section 6.1 is hereby amended by adding the following to the end thereof: During the first year of the First Renewal Term of the Lease, BHI shall, at its sole cost and expense, undertake the repairs and alterations (as Tenant Improvements) described in Exhibit A hereto. The estimated cost of said Tenant Improvements is approximately $1,500,000. BHI shall ensure that the same are undertaken in a good and workmanlike manner and are of such quality as will foster the provision of quality care by the Hospital to the patients served by it. 6. Section 22 (as reflected in the Third Amendment) is hereby amended by adding the following: provided, however, that BHI's right to the proceeds of said sale shall be subject and subordinate to any interest in the Leased Property which Morgan County may have under the terms of the documents evidencing or securing the Interim Debt or the new Debt and no such payment shall be made without the prior written consent of Morgan County. 7. The last sentence of Section 24.1 is hereby deleted in its entirety and the following inserted instead: This Lease may not be amended or modified except by written instrument signed by the parties hereto and approved in writing by Morgan County. 8. This Amendment shall be effective as of May 1, 1994. 3 36 9. Except as specifically set forth herein, the Lease as originally executed and amended to date, shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth above. BRIM HOSPITALS, INC. By: /s/ John R. Miller ------------------------------------------ Its: President ----------------------------------------- FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION By: /s/ Debra L. Hays ------------------------------------------ Its: Pres. ----------------------------------------- LENDER CONSENT The undersigned, being a duly authorized officer of Morgan County Federal Savings & Loan Association does hereby consent to the Amendments to Lease set forth above. MORGAN COUNTY FEDERAL SAVINGS & LOAN ASSOCIATION By: /s/ Michael M. Berryhill ------------------------------------------ Its: President ----------------------------------------- 4 37 EXHIBIT A TENANT IMPROVEMENTS As a component part of the expansion of Colorado Plains Medical Center, certain tenant improvements will be made which primarily focus on building systems. These improvements include certain general improvements to mechanical systems in the building, the replacement of boilers and the upgrading of the hot water heating system in the existing building. In addition, the existing domestic water supply system will be replaced, a secondary domestic water service will be attached, and chases to distribute the replacement hot water heating system and the domestic water supply system will be provided. The existing non-friable asbestos located in areas where equipment is to be replaced will be removed. The $1,500,000 tenant improvement package also includes related architectural and engineering, mechanical engineering and electrical engineering to complete this work. 38 FIFTH AMENDMENT TO LEASE AGREEMENT THIS FIFTH AMENDMENT TO LEASE AGREEMENT (the "Amendment") is made and entered into this _____ day of March, 1995 by and between FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION (the "Hospital Association") and BRIM HOSPITALS, INC. ("BHI"). RECITALS A. The Hospital Association and BHI are parties to that certain Lease Agreement dated May 15, 1986 (the "Lease Agreement"), pursuant to which BHI leases from the Hospital Association that certain real property located in Fort Morgan, Colorado as improved with that certain 40 bed acute care hospital commonly known as "Colorado Plains Medical Center" (the "Facility"). B. The Lease Agreement has been previously amended by those certain lease amendments (collectively, the "Prior Amendments") dated August 26, 1986, February 16, 1987, May 23, 1994 and November 8, 1994 (the "Fourth Amendment"). The Lease Agreement as amended by the Prior Amendments is referred to herein as the "Lease". C. The Hospital Association and BHI are working together in an effort to expand and renovate the Facility. In contemplation of future growth, the Hospital Association acquired, subsequent to the execution of the Lease Agreement, title to parcels of real property situated adjacent to the Facility and intends to acquire additional land in the near future. D. It is the original intent of the parties that all such additional parcels of real property be included as part of the land subject to the Lease. E. The purpose of this Amendment is to amend the description of the "Leased Property" subject to the Lease and to modify the Lease in certain other particulars as provided below. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT 1. SUBJECT PROPERTY Section "1. Subject Property." of the Lease is hereby amended by deleting in its entirety Exhibit A attached to the Lease which sets forth the description of the Real Property included as part of the Leased Property and substituting in its place Revised Exhibit A attached hereto and incorporated into the Lease by this reference. The Hospital Association and BHI acknowledge that the Hospital Association is currently attempting to acquire fee title to those certain additional parcels of real property described on Schedule 1 attached hereto and incorporated herein by this reference (the "Additional Land"). It is the intent of the parties that at such time that the Hospital Association 1 39 acquires a fee title interest to any portion of the Additional Land that such portion be included as part of the Leased Property. Accordingly, as a matter of administrative convenience for the parties, BHI and the Hospital Association hereby agree that at such time as the Hospital Association acquires fee title interest to any portion of the Additional Land, the portion so acquired shall automatically be deemed a part of the Real Property subject to the Lease without the requirement of the parties executing a further amendment to the Lease. 2. RENT DURING FIRST RENEWAL TERM Attachment 1 to the Third Amendment to the Lease Agreement is hereby amended to provide that the payment of the Prepaid Rent in the amount of One Million Dollars ($1,000,000.00) shall not be required to be paid in full at the commencement of the First Renewal Term and, in lieu thereof, said amount shall be paid in accordance with the following schedule: Upon the closing of the loan to be made by Morgan County Federal Savings & Loan Association, representing the New Debt: $450,000.00 April 1, 1995 $100,000.00 May 1, 1995 $225,000.00 June 1, 1995 $225,000.00
Except as expressly modified above, the obligation of BHI to pay the Prepaid Rent shall remain subject to all of the conditions set forth in Attachment 1 to the Third Amendment. 3. NEW DEBT BHI and the Hospital Association acknowledge that there is currently outstanding loans from Farmer's State Bank to the Hospital Association in the total collective amount of approximately One Hundred Eighty Thousand ($180,000.00) (the "Old Loan"), the repayment of which is secured by certain of the assets comprising the Leased Property. In order to repay in full the outstanding balance of the Old Loan and to provide additional financing to the Hospital Association for the purchase of the Additional Land, the amount of the loan from Morgan County Federal Savings & Loan Association to the Hospital Association has been increased by an amount not to exceed Three Hundred Thirty Thousand Dollars ($330,000). Accordingly, Section 4.1 of the Lease, as set forth in the Third Amendment and as subsequently amended by the Fourth Amendment, is hereby further amended by increasing the amount of $3,000,000.00 referenced in the last paragraph of Section 4.1 to an amount not to exceed $3,330,000.00. Section 4.1 is hereby further amended to provide that the payment by BHI of all principal and interest due under the New Debt shall be paid to the Hospital Association by deposit of the required amount into a separate account to be maintained in the name of the Hospital Association at Morgan County Federal Savings & Loan 2 40 Association ("Lender"). Promptly following the execution of this Amendment, the Hospital Association covenants and agrees to open said account with Lender and to make the necessary arrangements with Lender in order to (i) permit Lender to make automatic withdrawals from said account for payment of the monthly installments of principal and interest due under the New Debt and (ii) to restrict access to the account by the Hospital Association so as to assure that all amounts deposited by BHI pursuant to the Lease shall be applied to the principal and interest payments due pursuant to the New Debt. 4. FINANCIAL STATEMENTS BHI shall, from time to time upon not less than 10 days prior written notice from the Hospital Association, furnish to the Hospital Association and/or its lender a current financial statement which accurately reflects BHI's then financial condition. 5. EFFECT OF AMENDMENT Except as specifically set forth herein, the Lease as originally executed and amended to date, shall remain in full force and effect. 6. DEFINED TERMS Any term used herein which commences with an initial capital letter and is not otherwise defined herein shall have the same meaning in this Amendment as such term has in the Lease. 7. COUNTERPARTS This Amendment may be executed in two or more counterparts each of which shall be deemed an original for all purposes and all of which, when taken together, shall constitute one agreement. IN WITNESS WHEREOF, the parties hereby execute this Amendment as of the day and year first set forth above. BRIM HOSPITALS, INC. FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION By: /s/ John R. Miller By: /s/ Debra L. Hays --------------------------- -------------------------------- Its: President Its: Chairman -------------------------- ------------------------------- 3 41 LENDER'S CONSENT The undersigned, being a duly authorized officer of Morgan County Federal Savings & Loan Association, does hereby consent to the foregoing Fifth Amendment to Lease. MORGAN COUNTY FEDERAL SAVINGS & LOAN ASSOCIATION By: /s/ Michael M. Berryhill ------------------------------------- Its: President ------------------------------------ 4 42 REVISED EXHIBIT A LEGAL DESCRIPTION OF REAL PROPERTY PARCEL I: Lots 1 through 22, inclusive, Block 7, OLD FORT ADDITION TO THE CITY OF FORT MORGAN, according to the recorded plat thereof, Morgan County, Colorado. PARCEL II: Lot 1, Replat of Block 8, OLD FORT ADDITION TO THE CITY OF FORT MORGAN, according to the recorded plat thereof, Morgan County, Colorado. PARCEL III: Lots 3, 4, and 5, Replat of Block 8, OLD FORT ADDITION TO THE CITY OF FORT MORGAN, according to the recorded plat thereof, Morgan County, Colorado. PARCEL IV: Lot 6, REPLAT OF BLOCK 8, OLD FORT ADDITION TO THE CITY OF FORT MORGAN, according to the recorded plat thereof, Morgan County, Colorado. PARCEL V: Lot 7, Replat of Block 8, OLD FORT ADDITION TO THE CITY OF FORT MORGAN, according to the recorded plat thereof, Morgan County, Colorado. PARCEL VI: Lot 8, Replat of Block 8, OLD FORT ADDITION TO THE CITY OF FORT MORGAN, according to the recorded plat thereof, Morgan County, Colorado. PARCEL VII: Lot 9, Replat of Block 8, OLD FORT ADDITION TO THE CITY OF FORT MORGAN, according to the recorded plat thereof, Morgan County, Colorado. 5 43 SCHEDULE I DESCRIPTION OF ADDITIONAL LAND Lots 2 and 10, Replat of Block 8, OLD FORT ADDITION TO THE CITY OF FORT MORGAN, according to the recorded plat thereof, Morgan County, Colorado. 6 44 SIXTH AMENDMENT TO LEASE AGREEMENT THIS SIXTH AMENDMENT TO LEASE AGREEMENT (the "Amendment") is made and entered into the ______ day of ______________, 1996 by and between FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION (the "Hospital Association") and BRIM HOSPITALS, INC. ("BHI") RECITALS A. The Hospital Association and BHI are parties to that certain Lease Agreement dated May 15, 1986 (the "Lease Agreement"), pursuant to which BHI leases from the Hospital Association that certain real property located in Fort Morgan, Colorado as improved with that certain 40 bed acute care hospital commonly known as "Colorado Plains Medical Center") (the "Facility"). B. The Lease Agreement has been previously amended by those certain lease amendments (collectively, the "Prior Amendments") dated August 26, 1986, February 16, 1987, May 23, 1994 (the "Third Amendment"), November 8, 1994 (the "Fourth Amendment") and March _____, 1995 (the "Fifth Amendment"). The Lease Agreement as amended by the Prior Amendments is referred to herein as the "Lease". C. The Hospital Association and BHI are working together in an effort to expand and renovate the Facility. D. In order to facilitate that expansion, the Hospital Association has entered into a Loan Agreement with Morgan County Federal Savings & Loan Association (the "Lender") which has agreed to finance a portion of the costs thereof (the "Loan"). E. The cost of the expansion has exceeded the original estimate of the parties. In order to finance the additional costs required to complete the expansion, the Hospital Association has agreed to increase the amount to be raised by its community funding raising campaign, the Lender has agreed to increase the principal balance of the Loan and BHI has agreed to increase the amount of its Prepaid Rent. F. Brim and the Hospital Association now desire to amend the Lease to reflect such sources of additional financing and the additional rent obligation imposed on Brim as a result of the increase in the principal amount of the Loan. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: -1- 45 AGREEMENT 1. NEW DEBT Section 4.1 is hereby amended to reflect that the "New Debt" as referenced therein shall be the amount of the loan from Morgan County Federal Savings & Loan Association to the Hospital Association in an amount not to exceed $3,680,000.00. 2. PREPAID RENT The amount of Prepaid Rent as set forth in Attachment 1 to the Third Amendment to the Purchase Agreement is hereby amended by increasing said amount from $1,000,000 to an amount equal to $1,350,000. After all of the proceeds of the Loan and the proceeds of the Hospital Association's "Campaign" (as that term is defined below) have been disbursed and applied toward the cost of the expansion of the Facility, the $350,000 of additional Prepaid Rent shall be paid by BHI in increments as jointly determined by BHI and the Hospital Association to pay for the final costs of construction; provided, however, in no event shall said $350,000 be paid later than April 1, 1997. 3. CAMPAIGN The amount to be raised by the Hospital Association pursuant to its Community fund raising campaign (the "Campaign"), as provided for in the Third Amendment, is hereby increased from $1,000,000 to an amount equal to $1,350,000, all of which shall be applied by the Hospital Association toward the cost of constructing the expansion of the Facility. 4. EFFECT OF AMENDMENT Except as specifically set forth herein, the Lease as originally executed and amended to date, shall remain in full force and effect. 5. DEFINED TERMS Any term used herein which commences with an initial capital letter and is not otherwise defined herein shall have the same meaning in this Amendment as such term has in the Lease. 6. COUNTERPARTS This Amendment may be executed in two or more counterparts each of which shall be deemed an original for all purposes and all of which, when taken together, shall constitute one agreement. -2- 46 IN WITNESS WHEREOF, the parties hereby execute this Amendment as of the day and year first set forth above. BRIM HOSPITALS, INC. FORT MORGAN COMMUNITY HOSPITAL ASSOCIATION By: _______________________ By: __________________________ Its: _______________________ Its: __________________________ LENDER'S CONSENT The undersigned, being a duly authorized officer of Morgan County Federal Savings & Loan Association, does hereby consent to the foregoing Fifth Amendment to Lease. MORGAN COUNTY FEDERAL SAVINGS & LOAN ASSOCIATION By: __________________________ Its: __________________________ -3- 47 [NATIONWIDE HEALTH PROPERTIES, INC. LETTERHEAD] September 18, 1996 Via Facsimile Randi Nathanson, Esq. The Nathanson Group 1411 Fourth Avenue Suite 905 Seattle, WA 98101 RE: NATIONWIDE HEALTH PROPERTIES, INC. TRANSACTIONS WITH BRIM, INC. ("BRIM") AND BRIM SENIOR LIVING, INC. ("BSL") Dear Randi: This letter is in response to your Memorandum dated August 28, 1996 (the "Memorandum") regarding the sale of Brim's stock (the "Stock Transaction") and the merger of BSL (the "Merger Transaction"). Please be advised that Nationwide Health Properties, Inc. ("NHP") is agreeable to the proposed transactions subject to the following provisions. As provided herein, NHP is willing to consent to the proposed transactions and waive its right under the Leases (as hereinafter defined) to "put" the facilities to the tenant thereunder as a result of the Stock Transaction and/or the Merger Transaction. As used herein, "Leases" shall mean those certain leases between NHP, as landlord, and Brim subsidiaries, as tenant, with respect to those facilities commonly known as Ojai Valley Community Hospital, in Ojai, California, The Retirement Inn at Quail Ridge, in Oklahoma City, Oklahoma. The Retirement Inn at Forest Lane, in Dallas, Texas and Mesa Senior Village, in Mesa, Arizona. The aforementioned waiver shall be limited to NHP's put rights as a result of the Stock Transaction and the Merger Transaction. NHP's willingness to consent to the assignments under the Leases as a result of such transactions shall not, however, be deemed or construed as a consent and/or waiver of its put rights with respect to any other transfer or assignment in violation of the terms of any of the Leases. The Leases and other documents executed in connection therewith (collectively, the "NHP Documents") shall be appropriately modified to reflect the Stock Transaction and the Merger Transaction and the newly formed LLC shall fully assume all obligations of BSL to NHP. Except as set forth in such amendments and assumption agreements, all terms and conditions of the NHP Documents shall remain in full force and effect. NHP shall have also received appropriate reaffirmations form any guarantors of obligations under the NHP Documents. 48 Randi Nathanson, Esq. Page 2 Prior to the closing of the Stock Transaction and the Merger Transaction, NHP shall have completed and approved its due diligence, including, without limitation, satisfaction by NHP of the material terms and conditions of the proposed transactions; satisfaction by NHP with the final organization of and structure of the newly formed LLC and the purchaser of the Brim stock; receipt and approval by NHP of the then current financial statements of the purchaser of the Brim stock and the LLC; receipt and approval by NHP of evidence as to the due formation, power and authority of all parties to each transaction and the enforceability of all documents and agreements contemplated thereunder, receipt and approval of evidence of all governmental authorizations and approvals as are necessary for the continued operation of the leased facilities following the Stock Transaction and/or the Merger Transaction; and all necessary consents and/or amendments to the material contracts for the Mesa development project. Brim shall reimburse expenses incurred by NHP in connection with the above, including legal fees and expenses. Sincerely, /s/ Gary E. Stark - ------------------ Gary E. Stark vice President and General Counsel GES:pb cc: T. Andrew Stokes Kevin Sherry Tracy Johnson EX-10.20 16 LEASE AGREEMENT DATED 4-24-96 1 Exhibit 10.20 LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease") is made and entered into effective as of the 24th day of April, 1996 by and between Parkview Regional Hospital, Inc., a Texas non-profit corporation ("Landlord"), and Brim Hospitals, Inc., an Oregon corporation ("Tenant"). RECITALS In consideration of the mutual undertakings and covenants hereinafter contained and the acts to be performed hereunder, Landlord and Tenant hereby agree to the within Lease for the following acute care facility: Parkview Regional Hospital, 312 East Glendale Street, Mexia, Texas, (the "Hospital"), which is located on the real property described in Exhibit "A" attached hereto, and incorporated herein by this reference (the "Real Property"). For purposes hereof, the term "Hospital" shall include any additions or renovations thereof which result from the completion of the Development Program (as hereinafter defined). PART I Section 1. Landlord's Representations and Warranties. Landlord hereby makes the following representations, warranties and covenants to Tenant: (a) Authority. Landlord has full power and authority to execute and to deliver this Lease and all related documents, and to carry out the transaction contemplated herein. This Lease is valid, binding and enforceable against Landlord in accordance with its terms, except as such enforceability may be limited by creditors rights laws and general principles of equity. The execution of this Lease and the consummation of the transaction contemplated herein will not result in a breach of the terms and conditions of nor constitute a default under or violation of any law, regulation, court order, note, bond, indenture, articles of incorporation, agreement, license or other instrument or obligation to which Landlord is now a party or by which Landlord or any of the assets of Landlord may be bound or affected, Landlord has duly and properly taken or obtained or caused to be taken or obtained, or prior to the Commencement Date will have duly and properly taken or obtained or caused to be taken or obtained, all action necessary for Landlord (i) to enter into and to deliver this Agreement and any and all documents and agreements executed by Landlord in connection herewith or in furtherance hereof and (ii) to carry out the terms hereof and thereof and the transaction contemplated herein and therein. Landlord represents and warrants that as of the date of execution of this Agreement, it has secured the consent of its Board of Directors for the execution of this Agreement and of any documents or agreements necessary to carry out the terms hereof and for the consummation of the transactions contemplated by this Agreement. No other action by or on behalf of Landlord is or will be necessary to authorize the execution, delivery and performance of this Agreement and any documents and agreements executed by Landlord in connection herewith or consummation of the transactions contemplated herein, other than securing those third party consents and regulatory approvals for which Landlord is responsible under the terms hereof. Nothing herein shall be construed as a guarantee by Landlord that it will be able to secure the third party consents or regulatory approvals for which it is responsible, but rather this paragraph -1- 2 paragraph shall be limited to Landlord's representation and warranty that it will use its best efforts to secure such third party consents and regulatory approvals; (b) Title/Ownership of Real Property and Personal Property. On the Commencement Date, as defined below, Landlord will provide Tenant with the Hospital, including the Personal Property (as defined below). Landlord has fee title to the Hospital and the Real Property and marketable title to the Personal Property, subject only to the real and personal property encumbrances, set forth in Exhibit "B". The Personal Property is all of the property currently utilized for the operation of the Hospital at its current occupancy level and all of the Personal Property is owned by Landlord except as otherwise provided in those operating and capital leases attached hereto as Exhibit "C." (c) Operating Contracts. Landlord has entered into certain operating agreements in connection with its operation of the Hospital and those which Tenant shall assume as of the Commencement Date are listed on Exhibit "D" (the "Operating Agreements"), subject to Landlord securing any and all consents necessary for said assumption, it being understood and agreed that any such agreements which are not listed on Exhibit "D" shall be and remain the responsibility of Landlord after the Commencement Date and Tenant shall have no liability with respect thereto; (d) Licenses/Certification. The Hospital has a current license for 77 acute care beds issued by the Texas Department of Health and current valid provider agreements under the Medicaid/Medicare Programs for reimbursement for acute care services and is accredited by the Joint Commission on Accreditation of Health Care Organizations. To the best of Landlord's knowledge, the Hospital is in compliance with all applicable State and Federal statutes, rules or regulations governing the operations of the Hospital, except as may be shown on State survey reports previously provided to Tenant. There is no action pending or, to the best knowledge of Landlord, threatened by the appropriate State or Federal agency having jurisdiction thereof, to revoke or rescind the Hospital's license or to terminate the participation of the Hospital in the Title XVIII and/or XIX Programs or the JCAHO accreditation of the Hospital, nor is there any decision not to renew any provider agreement related to the Hospital, or any action of any other type which would have a material adverse effect on the Hospital, its operations or business. (e) Intentionally Omitted. (f) Employees of the Hospital; Unions. Except as set forth in Exhibit "E", none of the employees of the Hospital are subject to any employment agreement or collective bargaining agreement nor, to Landlord's actual knowledge, are any such employees engaged in any union organizing activities. Landlord is not presently a party to any labor dispute or grievance subject to Federal labor laws, except as disclosed to Lessee prior to the execution of this Agreement. Landlord will promptly advise Tenant of any such labor matters which arise subsequent to the execution of this Agreement. (g) Surveys and Reports. Complete copies of the most recent survey reports, any waivers of deficiencies, plans of correction, and any other investigation reports issued with respect to the Hospital have been provided by Landlord to Tenant prior to execution of this Agreement. -2- 3 (h) Inventory. All inventories of non-perishable food and central supplies located at the Hospital are in sufficient condition and quantity to operate the Hospital at normal capacity for two (2) weeks or at such higher levels as may be required by law. All inventories of perishable food are at levels normally maintained by Landlord or at such higher levels as may be required by law. (i) Litigation. Except as provided in Exhibit "F", there is no litigation, investigation or other proceeding pending or threatened against or relating to Landlord, its properties or business, which is material to the Premises (as defined below) or to this Agreement, and the transaction contemplated herein has not been challenged by any governmental agency or any other person, nor does Landlord know, or have reasonable grounds to know, of any basis for any such litigation, investigation or other proceeding; (j) Liens. There are no mechanic's, materialmen's or similar claims or liens presently claimed or, to the best of Landlord's knowledge, which will be claimed against the Hospital for work performed or commenced prior to the date hereof at the request of Landlord or of which Landlord has knowledge, Landlord having made or caused to be made arrangements for payment of all those improvements now under construction or development including those which may be shown on the preliminary title commitment; (k) Mortgages/Security Instruments. Neither the Real Property nor the Hospital nor the Personal Property is subject to any mortgages or deeds of trust or other security instruments, other than those described in Exhibit "B" hereto nor, without the prior written consent of Tenant, which consent shall not be unreasonably withheld, shall Landlord so encumber the Real Property or the Hospital at any time during the term hereof; provided, however, that Landlord shall be entitled to encumber the Real Property and the Hospital in connection with the execution and delivery of the deed of trust or mortgage and related security documents securing the Loan (as defined in Part I, Section l(x))(collectively, the "Development Mortgage") provided Landlord secures Tenant's prior approval of the terms and conditions thereof, which approval shall not be unreasonably withheld; (l) Financial Statements. Attached as Exhibit "G" is Landlord's balance sheet dated January 31, 1996 (the "Balance Sheet"). To the best of Landlord's knowledge, the Balance Sheet fairly presents the financial condition of Landlord as of such date and was prepared in accordance with generally accepted accounting principles on a basis consistent with that used in prior periods. (m) Undisclosed Liabilities. Except for liabilities set forth in the Balance Sheet or in Exhibit "H", and any liabilities incurred since January 31, 1996 in the case of the Balance Sheet in the ordinary course of business in accordance with past operations and practices, to the best of Landlord's knowledge, neither Landlord nor the Hospital is subject to any liabilities or obligations of any kind, whether accrued, absolute, contingent or otherwise. Landlord does not know of, nor does it have any reasonable ground to know of, any basis for the assertion against Landlord or the Hospital of any such liability. With respect to any liabilities either set forth in the Balance Sheet or otherwise incurred in the ordinary course of business which involve claims by third parties with respect to the services provided by Landlord or its agents or employees, Landlord -3- 4 maintains professional liability insurance with limits of $1 million per occurrence and $3 million in the aggregate which provides coverage on a claims made basis and said insurance is, as of the date hereof, and shall remain until the Commencement Date, in full force and effect; (n) Accounts Receivable. To the best knowledge of Landlord, after reasonable investigation, the accounts receivable of Landlord to be purchased under Part II, Section 5.1 arose from bona fide transactions in the ordinary course of Landlord's business and the allowance for bad debts is appropriate and sufficient. (o) Zoning. The Real Property is currently not subject to any zoning requirements of the City of Mexia or the County of Limestone, Texas. Accordingly, Landlord has no reason to believe that the rebuilding of the Hospital in the event of the damage thereto or destruction thereof would not be permitted. Landlord has obtained all necessary governmental consents, permits and approvals, including, but not limited to, a Certificate of Occupancy, for the use and operation of the Hospital. Landlord has provided Tenant with a letter issued by the City of Mexia confirming the representation set forth herein with respect to the absence of zoning affecting the Real Property and with a true and correct copy of the Certificate of Occupancy for the Hospital. (p) Hill-Burton Liability. Landlord has no liability under the Hill-Burton Program and Tenant will have no liability or obligation, as transferee of the Hospital or otherwise, under the Hill-Burton Program as a result of this Lease. (q) Environmental Matters. (i) Neither Landlord nor the Hospital is subject to any existing or pending investigation or action by any federal, state, or local governmental authority under any Environmental Law (as defined below). (ii) Except as set forth in that Phase I Assessment prepared by ATC Environmental, a true and correct copy of which is attached hereto as Exhibit "I", no Hazardous Substance (as defined below) has at any time been generated, used, stored, released, or disposed of on, under or from the Hospital; Landlord has filed all reports and documents required to be filed under applicable Environmental Law with respect to the Hospital. There are no underground tanks on the Hospital; and the Hospital is free from any Hazardous Substance, in each case except as set forth on Exhibit "I". (iii) The term "Environmental Law" means any federal, state, or local law, statute, ordinance, or regulation pertaining to health, industrial hygiene, the use or disposal of Hazardous Substances or the environmental conditions (including soil and groundwater conditions) on, under, or about the Hospital, including, without limitation (a) the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), 42 USC Section 9601 et seq., and (b) the Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 USC Section 6901 et seq., and (c) to the extent that the laws of the State of Texas establish a meaning for "hazardous substance" or "release" which is broader than that specified in CERCLA, as CERCLA may be amended from time to time, or a meaning for "solid waste," "disposal," and "disposed" which is broader than -4- 5 specified in RCRA, as RCRA may be amended from time to time, such broader meanings under said state law shall apply in all matters relating to the laws of the State of Texas. The term "release" will have the meaning given to it by CERCLA. (iv) The term "Hazardous Substance" includes without limitation the following: (a) Those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances," and "hazardous wastes," or "solid wastes" in CERCLA; RCRA; the Hazardous Materials Transportation Act, 42 USC Section 1801 et seq.; and the Clean Water Act, 33 USC Section 1251 et seq.; and in the regulations promulgated pursuant to such statutes; (b) Those substances defined as "hazardous substances," "hazardous materials," "toxic substances," "hazardous wastes," "dangerous wastes," or "solid wastes," in applicable Texas state and local environmental statutes and in any regulations promulgated pursuant to such statutes; (c) Those substances listed in the United States Department of Transportation Table (49 CFR 172.101 and amendments thereto) or by the Environmental Protection Agency as hazardous substances (40 CFR part 302 and amendments thereto); (d) Such other substances, materials and wastes as are or become regulated, or are classified as hazardous or toxic under federal, state or local laws or regulations; and (e) Any material, waste or substance which is or which contains (i) asbestos, (ii) polychlorinated biphenyls, or (iii) radioactive materials. (r) Petty Cash. Exhibit "J" sets forth a correct and complete list of all petty cash accounts maintained by Landlord. Landlord will sign all documents and instruments necessary to transfer such petty cash to Tenant. Any other cash or cash equivalents owned by Landlord shall be and remain the property of Landlord after the Commencement Date. (s) Licenses. Landlord has all material licenses, permits and authorizations necessary for the lawful ownership and operation of the Hospital (the "Landlord Licenses"). True and correct copies of the licenses issued most recently by the applicable health care authority with respect to the operation of the Hospital are attached hereto as Exhibit "K." Landlord has not received written or verbal notice of any action or proceeding which has been initiated or is proposed to be initiated by the appropriate state or federal agency having jurisdiction thereof, to either revoke, withdraw or suspend any of the Landlord Licenses or to terminate the participation of the Hospital in either the Medicare or Medicaid Programs (to the extent it participates therein) or any judicial or administrative agency judgement or decision not to renew any of the Landlord Licenses or any licensure or certification action of any other type, which would have a material adverse effect on the business, assets or financial condition of the Hospital. -5- 6 (t) Compliance with Law. With respect to the compliance of the Hospital with law: (i) Set forth in Exhibit "L" is a list of the most recent licensure or certification survey for the Hospital and the clinical service areas included therein, such as pharmacy, laboratory and X-Ray, copies of which have been made available to Tenant as of the date hereof. To the best of Landlord's knowledge, the Hospital and its current operation and use is in substantial compliance with all applicable municipal, county, state and federal laws, regulations, ordinances, standards and orders and with all municipal health, building and zoning by-laws and regulations (including, without limitation, the building, zoning and life safety codes) where the failure to comply therewith would have a material adverse effect on the business, property, condition (financial or otherwise) or operation thereof; (ii) There are no outstanding cited deficiencies or written work orders of any authority having jurisdiction over the Hospital requiring conformity to any applicable statute, regulation, ordinance or bylaw, which have not been corrected as of the date hereof; (iii) Landlord has not received written or, to the best of Landlord's knowledge, verbal notice from any licensing or certifying agency supervising or having authority over the Hospital requiring it to be reworked or redesigned or additional furniture, fixtures, equipment or inventory to be provided thereat so as to conform to or comply with any existing law, code or standard except where the requirement either (A) has been fully satisfied prior to the date hereof, (B) will be satisfied by Landlord prior to the Commencement Date, (C) will be in the process of being satisfied in the ordinary course of Landlord's business pursuant to the terms of a Plan of Correction or other documentation submitted to and approved by the appropriate authority or (D) will be the subject of a valid written waiver issued by the applicable licensing or certifying agency; and (iv) If and to the extent applicable, Landlord has no knowledge based on the results of facility surveys or complaint investigations provided verbally or in writing to the Hospital by the applicable supervising agency or authority that the Hospital participating in the Medicare or Medicaid Programs or certified by JCAHO is not in substantial compliance with all Conditions and Standards of Participation in the Medicare and Medicaid Programs or with all applicable requirements of the JCAHO. (v) There is no action pending or threatened against the Hospital to revoke or suspend its license or to ban or limit admissions thereto or, to the extent applicable, to terminate or not renew its participation in the Medicare or Medicaid Programs. (u) Taxes. All tax and other returns, reports and filings of any kind or nature, required to be filed by Landlord with respect to its ownership of and operations at the Hospital prior to date of execution of this Agreement have been properly completed and timely filed, or extensions for the filing thereof have been timely secured, with all such filings being in material compliance with all applicable requirements and all taxes due with respect to Landlord have been timely paid, except to the extent that the same are being duly contested in good faith in accordance with applicable law and adequate reserves therefor are reflected on the Balance Sheet or will be reflected in any subsequent -6- 7 financials prepared in accordance with the representations and warranties contained in this Agreement. (v) Fraud and Abuse. Landlord has not (i) made any contributions, payments or gifts to or for the private use of any governmental official, employee or agent where either the payment or the purpose of such contribution, payment or gift is illegal under the laws of the United States or the jurisdiction in which made, (ii) established or maintained any unrecorded fund or asset for any purpose or made any false or artificial entries on its books, (iii) given or received any payments or other forms of remuneration in connection with the referral of patients which would violate the Medicare/Medicaid Anti-kickback Law, Section 1128(b) of the Social Security Act, 42 USC Section 1320a-7b(b) or any analogous state statute or (iv) made any payments to any person with the intention or understanding that any part of such payment was to be used for any purpose other than that described in the documents supporting the payment. Landlord shall not be deemed to be in breach of this representation and warranty in the event the same is untrue as a result of the acts or omissions of Tenant's or the same was known to be untrue to, affiliate, Brim Healthcare, Inc., in its capacity as the manager of the Hospital. (w) Disclosure. No representation or warranty by or on behalf of Landlord contained in this Agreement, as those representations have been modified by any written exceptions thereto delivered by Landlord to Tenant and no statement contained in any certificate, list, exhibit, or other instrument furnished or to be furnished to Tenant pursuant hereto contains or will contain any untrue statement of a material fact, or omits or will omit to state any material facts which are necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. (x) Development Program. As of the date hereof, Landlord has committed to undertake the development program described in Exhibit "M," which is currently estimated to have a cost of approximately $4.9 million (the "Development Program"). In order to facilitate the same, Landlord represents and warrants that it will proceed with all due diligence to secure a loan in the principal amount of approximately $3 million from a commercial lender to finance the cost of the Development Program (the "Loan"), the terms and conditions of which shall be acceptable to both Landlord and Tenant, it being understood and agreed that this Lease shall be pledged by Landlord as collateral for the Loan. In addition, Landlord shall make available such additional funds as may be needed to ensure the timely completion of the Development Program, it being understood and agreed, however, that Tenant shall provide the vehicles, equipment, furniture, fixtures and furnishings listed on Exhibit "R" (the "Development Program Equipment"), which has an aggregate value of approximately $660,000 in order to assist Landlord in the completion of the Development Program. Landlord shall bear any and all costs necessary to negotiate and consummate the Loan, including but not limited to, survey fees, title fees, loan commitment fees and legal fees. Section 2. Tenant's Representations and Warranties. Tenant hereby makes the following representations, warranties and covenants to Landlord: -7- 8 (a) Authority. Tenant has full power and authority to execute and to deliver this Lease and all related documents, and to carry out the transaction contemplated herein. This Lease is valid, binding and enforceable against Tenant in accordance with its terms, except as such enforceability may be limited by creditors rights laws and general principles of equity. (b) No Conflict. Subject to obtaining the approval of Tenant's Board of Directors, the execution of this Lease and the consummation of the transaction contemplated herein, will not result in a breach of the terms and conditions of nor constitute a default under or violation of any law, regulation, court order, mortgage, note, bond, indenture, articles of organization, agreement, license or other instrument or obligation to which Tenant is now a party or by which Tenant or any of the assets of Tenant may be bound or affected. Section 3. Landlord's Covenants. Landlord covenants and agrees for the benefit of Tenant as follows: Section 3.1. Pre-Delivery Date. From and after the date of the execution of this Agreement and until the fifth day after the satisfaction or waiver of the conditions to the effectiveness of this Lease set forth in Part I, Sections 6 and 7 (the "Delivery Date"), except as contemplated by this Agreement or with the consent of Tenant, which consent shall not be unreasonably withheld, conditioned or delayed: Section 3.1.1. Landlord will comply with all of its obligations under that Management Agreement dated November 27, 1991 between Landlord and Tenant's affiliates, Brim Healthcare, Inc., as amended by First Amendment, Second Amendment and Third Amendment dated February 1, 1992, February 1, 1993 and June 27, 1995, respectively (the "Management Agreement"). Section 3.1.2. As soon as practicable after the date hereof but in no event later than April 30, 1996, Landlord will deliver to Tenant (i) a UCC-1 search report in the name of Landlord and the Hospital conducted at the state and county level and (ii) a title insurance commitment for a leasehold policy with respect to the Premises (the "Leasehold Title Policy") with a value equal to the present value of the aggregate rent due hereunder during the Initial Term and each Extension Term, the cost of both of which shall be borne by Tenant; Section 3.1.3. Within five (5) days after Landlord's receipt of Tenant's title objections, UCC search and survey objections pursuant to Part I, Section 4.1.1, Landlord shall advise Tenant whether it intends to correct the defects to which Tenant has objected. Section 3.1.4. Landlord will use its best efforts to cause all of the conditions set forth in this Part I, Sections 6 and 7 which are within Landlord's control to be satisfied and Landlord will not take any action inconsistent with its obligations under this Agreement or which could hinder or delay the consummation of the transaction contemplated by this Agreement or which is intended to cause any representation, warranty or covenant made by Landlord in this Agreement or in any certificate, list, exhibit, or other instrument furnished or to be furnished pursuant hereto, or in connection with the transaction contemplated hereby, to be untrue in any material respect as of the Commencement Date; -8- 9 Section 3.1.5. Neither Landlord nor any of its board members, officers advisors, or others authorized to act on its behalf shall directly initiate or solicit discussions relating to any alternative acquisition proposal or similar transaction including, without limitation, a merger or other business combination involving Landlord or the Premises or any part thereof, or offer to acquire or convey in any manner, directly or indirectly, all or substantially all of the equity interests in Landlord or the Premises; provided, however, that public announcements of the transaction contemplated by this Agreement shall not be prohibited hereby; Section 3.1.6. Landlord will not do or to cause to be done any of the acts which it has covenanted not to do under this Part I, Section 3.1; and Section 3.1.7. Landlord will proceed with all due diligence to secure any regulatory approvals and third party consents for which it is responsible under the terms hereof. Section 3.2. Delivery Date. On the Delivery Date, Landlord will deliver or cause to be delivered to Tenant the following: Section 3.2.1. The Premises in their AS IS, WHERE IS condition, it being understood and agreed that Tenant has agreed to accept the same in said condition; Section 3.2.2. A certificate of a responsible officer of Landlord dated as of the Delivery Date, certifying on behalf of Landlord in such detail as Tenant may reasonably specify the fulfillment of the conditions set forth in this Part I, Section 6.4; Section 3.2.3. Evidence reasonably satisfactory to Tenant that the requisite consent of the Board of Directors of Landlord has been obtained authorizing and approving the transactions contemplated herein; Section 3.2.4. A duly executed Assignment of the Operating Contracts, which shall be in the form attached hereto as Exhibit "N" (the "Operating Contract Assignment Agreement"); Section 3.2.5. A duly executed Assignment of Landlord's Working Capital (as defined in Part II, Section 5,1) which shall be in the form attached hereto as Exhibit "O" (the "Working Capital Assignment Agreement"); Section 3.2.6. The Leasehold Title Policy; and Section 3.2.7. A duly executed Employee Leasing Agreement, which shall be in the form attached hereto as Exhibit "P" (the "Employee Leasing Agreement"). Section 3.3. Post Delivery Date. From and after the Delivery Date, Landlord shall take such actions and properly execute and deliver to Tenant such further instruments of assignment, conveyance and transfer as, in the reasonable opinion of counsel for Tenant and Landlord, may be reasonably necessary to assure, complete an evidence the transaction provided for herein. -9- 10 Section 4. Tenant's Covenants. Tenant covenants and agrees with Landlord as follows: Section 4.1. Pre-Delivery Date. Between the date hereof and the Delivery Date, except as contemplated by this Agreement or with the consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed: Section 4.1.1. Within ten (10) days after its receipt of the Title Commitment and an ALTA survey of the Real Property and the Hospital (the "Survey"), Tenant shall advise Landlord in writing of its objections, if any, to the Title Commitment, Survey and UCC search report. If Landlord refuses to correct some or all of the title, survey or lien defects objected to by Tenant or to give Tenant reasonable assurances that the same will be corrected as of the Commencement Date, Tenant shall have ten (10) days to advise Landlord of its decision to close, notwithstanding the defects, or of its election to terminate this Agreement, in which case neither party shall have any further rights or obligations hereunder. Any matter reflected on the Title Commitment or Survey and not objected to by Tenant in accordance with the terms hereof, shall be deemed accepted by Tenant; Section 4.1.2. Tenant will proceed with all due diligence to obtain any third party consents and regulatory approvals for which it is responsible under the terms hereof. Section 4.1.3. Unless specifically prohibited by law, Tenant will use its best efforts to cause all of the conditions set forth in Part I; Sections 6 and 7 which are within its control to be satisfied and Tenant will not take any action inconsistent with its obligations under this Agreement or which could hinder or delay the consummation of the transaction contemplated by this Agreement or which is intended to cause any representation, warranty or covenant made by Tenant in this Agreement or in any certificate, list, exhibit, or other instrument furnished or to be furnished pursuant hereto, or in connection with the transaction contemplated hereby, to be untrue in any material respect as of the Commencement Date; and Section 4.1.4. Tenant will not do or to cause to be done any of the acts which it has covenanted not to do under this Part I, Section 4. Section 4.2. Delivery Date. On the Delivery Date, Tenant will deliver to Landlord the following documents: Section 4.2.1. A certificate of a responsible officer of Tenant dated as of the Delivery Date certifying on behalf of Tenant in such detail as Landlord may reasonably specify the fulfillment of the condition set forth in Part I, Section 7.3; Section 4.2.2. Resolutions of Tenant's Board of Directors, certified by the Secretary of Tenant authorizing and approving the transaction contemplated herein; Section 4.2.3. The executed Operating Contract Assignment Agreement, Section 4.2.4. The executed Working Capital Assignment Agreement; and -10- 11 Section 4.2.5. The executed Employee Leasing Agreement. Section 4.3. Post-Delivery Date. After the Delivery Date, Tenant will: Section 4.3.1. Provide Landlord with access during normal business hours to any books or records which Landlord may need to file or to defend tax returns or other filings filed prior to or subsequent to the Commencement Date which relate to the period prior to the Commencement Date; and Section 4.3.2 Take such actions and properly execute and deliver such further instruments as Landlord may reasonably request to assure, complete and evidence the transaction provided for in this Agreement. Section 5. Mutual Covenants. Following the execution of this Agreement, Landlord and Tenant agree: Section 5.1. Cure of Preventing Conditions. If any event should occur, either within or without the knowledge or control of any party, which would prevent fulfillment of the conditions to the obligations of any party hereto to consummate the transactions contemplated by this Agreement, to use its or their reasonable efforts to cure the same as expeditiously as possible; Section 5.2. Cooperation. To cooperate fully with each other in preparing, filing, prosecuting, and taking any other actions which are or may be reasonable and necessary to obtain the consent of any governmental instrumentality or any third party, to accomplish the transactions contemplated by this Agreement; Section 5.3. Delivery. To deliver such other instruments of title, certificates, consents, endorsements, assignments, assumptions and other documents or instruments, in form reasonably acceptable to the party requesting the same and its counsel, as may be reasonably necessary to carry out and/or to comply with the terms of this Agreement and the transactions contemplated herein; Section 5.4. Conferences. To confer on a regular basis with the other, report on material operational matters and promptly advise the other orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen could have, a material adverse effect on such party or which would cause or constitute a material breach of any of the representations, warranties or covenants of such party contained herein; Section 5.5. Information. To promptly provide the other (or its counsel) with copies of all other filings made by such party with any state or federal governmental entity in connection with this Agreement or the transactions contemplated hereby; Section 5.6. Consents/Approvals. Each of Tenant and Landlord will use its best efforts to obtain prior to the Commencement Date all consents, approvals and licenses necessary to permit the consummation of the transactions contemplated by this Agreement, including, but not limited to, such licensure and certification approval as may be necessary to enable Tenant to lawfully own -11- 12 and/or operate the Hospital from and after the Commencement Date and the consent of its lenders, lessors and other third parties to the extent required under any loan documents, lease agreements, management agreements or other instruments to which it is a party. Section 5.7 Press Releases. The parties shall consult with each other prior to the issuance by either party of any press release or any written statement with respect to this Agreement or the transactions contemplated hereby. Section 6. Conditions to Tenant's Obligations. The obligation of Tenant under this Lease are subject to the satisfaction or waiver by Tenant of each of the following conditions on or before the Commencement Date: Section 6.1. Licenses. Tenant and Hospital will have received all permits, licenses, orders, certifications and approvals from all federal, state and local governmental and regulatory bodies required to enable Tenant to operate the Hospital under this Lease. Section 6.2. Adverse Changes. There shall be no material adverse change in the financial condition or operations of the Hospital prior to the Commencement Date. In addition, there shall be no material adverse changes or modifications to any of the disclosures set out in the Exhibits to this Lease prior to the Commencement Date. Section 6.3. Insurance. Landlord will have obtained a "tail" policy or Tenant will have obtained a claims made policy, acceptable to Tenant, insuring Tenant and Landlord against the risks ordinarily insured by standard professional malpractice liability insurance available to the hospitals respect to incidents, errors, omissions and claims which arose, existed or were created before the Commencement Date and with limits and carriers approved by Tenant. Section 6.4. Representations. Etc. Each of the representations, warranties and covenants of Landlord set forth in this Lease will be correct and fully performed. Section 6.5. Title Insurance. Tenant will have received a commitment from Chicago Title Insurance Company to issue a policy (the "Title Policy") insuring the leasehold estate of Tenant in the Real Property (at Tenant's expense), subject only to liens approved by Tenant. Section 6.6. Environmental Audit. Tenant will have received, at Landlord's expense, a level one environmental study and will have accepted the conclusions and results of the study, which acceptance will be in Tenant's sole discretion. Section 6.7. Due Diligence. Tenant shall be satisfied with the results of its due diligence investigation of Landlord and the Premises, which investigation shall include, but not be limited to, a review of (i) the books and records of Landlord related to the Hospital, (ii) the books and records of the Hospital, including records relating to escrow accounts, accounts payable, leases or occupancy agreements in effect with the patients or tenants of the Hospital or any portion thereof, operating statements for the prior three (3) years, rent rolls for the prior three (3) years, operating contracts with vendors and other third parties providing goods and services to the Hospital, (iii) an MAI -12- 13 appraisals of the Premises in the possession of Landlord, (iv) a structural inspection of the Premises conducted by an engineer retained by Tenant and (v) any seismic assessments, wetlands and soils reports in Landlord's possession and delivered to Tenant or otherwise acquired by Tenant at its own cost and expense. Section 6.8. UCC Search. Tenant shall be satisfied with the results of the UCC Search. Section 6.9. Damage, Destruction, Condemnation. The Premises shall not have been damaged or destroyed nor taken by condemnation or eminent domain proceeds nor subject to any pending condemnation action or eminent domain proceeding. Section 7. Conditions to Landlord's Obligations. The obligation of Landlord under this Lease are subject to the satisfaction or waiver by Landlord of each of the following conditions on or before the Commencement Date: Section 7.1. Licenses. Tenant and Hospital will have received all permits, licenses, orders, certifications and approvals from all federal, state and local governmental and regulatory bodies required to enable Tenant to operate the Hospital under this Lease. Section 7.2 Insurance. Landlord will have obtained a "tail" policy or Tenant will have obtained a claims made policy, insuring Tenant and Landlord against the risks ordinarily insured by standard professional malpractice liability insurance available to the hospitals respect to incidents, errors, omissions and claims which arose, existed or were created before the Commencement Date and with limits and carriers approved by Tenant. Section 7.3. Representations. etc. All of the representations and warranties of Tenant set forth herein shall be true and correct as of the Commencement Date in all material respects and Tenant shall have performed as of the Commencement Date all of its obligations hereunder which it is required to perform as of said date. Section 7.4. Assignment and Assumption Agreement. Landlord and Tenant shall have executed and delivered an Assignment and Assumption Agreement with respect to the Operating Contracts listed in Exhibit D and the liabilities set forth in Exhibit G-1. Section 8. Termination. Section 8.1. By Landlord or Tenant. This Agreement may be terminated by Tenant or Landlord prior to the Commencement Date upon the following conditions: (a) By mutual consent of the parties; (b) By Tenant if the conditions set forth in Part I, Section 6 have not been satisfied or waived by the Outside Commencement Date; -13- 14 (c) By Landlord if the conditions set forth in Part I, Section 7 have not been satisfied or waived by the Outside Commencement Date; and (d) By either party if the Lease Term has not commenced by July 1, 1996 (the "Outside Commencement Date"). Section 8.2. Notice and Cure. Neither party to this Agreement may claim termination or pursue any other remedy referred to in Part I, Section 8.1 on account of a breach of a condition, covenant or warranty by the other, without first given such other party written notice of such breach and not less than ten (10) days within which to cure such breach. The Commencement Date shall be postponed if necessary to afford such opportunity to cure provided, however, in no event shall it be postponed beyond the Outside Commencement Date. Section 8.3. Landlord's Remedies. In the event of the termination of this Agreement by Landlord under either Part I, Section 8.1(c) or Section 8.1(d) where, in either case the term has failed to commence as a result of a material breach by Tenant of its obligations hereunder, Landlord shall be entitled to terminate this Agreement and sue to recover any damages suffered by it as a result of said breach. Section 8.4. Tenant's Remedies. In the event of the termination of this Agreement by Tenant under either Part I, Section 8.1(b) or Section 8.1(d) where, in either case the term has failed to commence as a result of a material breach by Landlord of its obligations hereunder, Tenant shall have the right either (A) to seek specific performance of Landlord's obligations hereunder or (B) to terminate this Agreement and sue to recover any damages suffered by it as a result of said breach. Section 8.5. Mutual Termination Without Recourse. In the event of the termination of this Agreement pursuant to Part I, Section 8.1(a) neither party shall have any further rights or obligations hereunder. PART II Section 1. The Premises. Section 1.1. Landlord hereby demises and leases to Tenant and Tenant hereby leases and takes from Landlord, the real estate described in Exhibit "A" attached hereto and by this reference made a part hereof (the "Real Property") and the improvements thereon or to be added thereto in conjunction with the Development Program that do or will upon completion constitute the Hospital. Notwithstanding the foregoing, Landlord and Tenant acknowledge and agree that Landlord shall be responsible for the supervision of the Development Program and that Tenant shall not be in breach of its obligations hereunder in the event of any delay in the completion of the Development Program which results from a breach by Landlord of its obligations with respect thereto; provided, however, that Tenant shall provide a project manager to assist Landlord with the supervision of the Development Program; and provided, further, that in the event that neither Landlord nor the lender under the Loan has completed the Development Program on or before December 1, 1997, Tenant shall have the right to terminate this Lease, it being understood and -14 - 15 agreed that the completion of the Development Program was a material inducement to both Landlord's and Tenant's willingness to enter into this Lease. Section 1.2. Landlord hereby demises and leases to Tenant, and Tenant hereby leases and takes from Landlord, the vehicles, equipment, furniture, furnishings, and fixtures listed on Exhibit "Q", attached hereto and by this reference made a part hereof located therein (such equipment, vehicles, furniture, furnishings and fixtures, together with all replacements thereof and additions thereto financed with the proceeds of the Loan as part of the Development Program, will hereinafter be referred to as the "Personal Property"). The Development Program Equipment together with any other equipment that is necessary or convenient to operate the Hospital and which is acquired, in addition to the Personal Property, shall be acquired by and at the cost of Tenant and the same shall be and remain the property of Tenant ("Tenant's Equipment"). Landlord and Tenant acknowledge and agree that Tenant's Equipment shall include, but not be limited to, the equipment described in Exhibit "R" which Tenant has agreed to lease in connection with and to facilitate the Development Program and which Tenant shall have the right to remove from the Hospital at the end of the Term hereof, whether by expiration or earlier termination, unless Landlord elects to assume the leases with respect thereto if and to the extent Tenant has obligations outstanding thereunder as of said termination date; provided, however, that in the event of the termination of this Lease as a result of the default of Tenant hereunder, Tenant shall have no right to remove said portion of the Tenant's Equipment from the Hospital but shall be obligated to assign the leases related thereto to Landlord effective upon the date of said termination and any default by Tenant thereunder which is cured by Landlord in conjunction with said assumption shall be added to the damages owing to Landlord as a result of Tenant's default hereunder. Section 1.2.1. Tenant shall keep all of the Personal Property in good working order and condition at Tenant's sole cost and expense, and at the expiration or termination of the Lease Term shall return and deliver all of such property to Landlord in as good order and condition as when received hereunder, reasonable wear and tear excepted. If necessary for the proper operation of the Hospital, Tenant shall during the Lease Term replace part or all of the items of Personal Property which have been damaged or destroyed or become worn out or obsolete, and such replacement shall be at the sole cost of Tenant, but any such replaced equipment shall be and remain the property of Landlord, subject, however, to Landlord's obligations under Part II, Section 2.3. In furtherance of Tenant's obligations hereunder, Landlord shall assign to Tenant all of its right, title and interest in and to any warranties granted to Landlord in connection with any of the Personal Property acquired as a part of the Development Program. Section 1.2.2. Landlord agrees upon request of Tenant to subordinate any statutory or Landlord's lien that Landlord may have to any security interest granted by the Tenant to secure a purchase money obligation or an acquisition lease of any of Tenant's Equipment acquired by Tenant pursuant to Part II, Section 1.2.1. Section 1.3. Throughout this Lease Agreement, the Real Property, the Hospital and the Personal Property will collectively be referred to as the "Premises". The Premises shall in no event include Tenant's Equipment as defined in Part II, Section 1.2.1. -15- 16 Section 2. Term and Right of First Refusal. Section 2.1. Initial Lease Term. Subject to the satisfaction of the conditions set forth in Part I, Section 3 and 4, and regardless of the date of the execution of this Agreement or of the Delivery Date as defined in this Agreement, the Term of this Lease shall commence effective retroactively to February 1, 1996 (the "Commencement Date") and shall extend for a period of fifteen (15) years thereafter, unless extended or earlier terminated as provided herein (the "Initial Lease Term"). Section 2.1.1. Tenant shall have the right to renew this Lease beyond the Initial Lease Term for two five (5) year renewal term(s) (the "Renewal Term(s)) by giving notice of the exercise of its renewal option at least one hundred twenty (120) days prior to the expiration of the Initial Lease Term and each Renewal Term. In the event Tenant is in default on the date of the giving of notice of its intent to renew the Lease, the notice may at Landlord's option be ineffective; in the event Tenant is in default on the date the applicable Renewal Term is to commence, then at Landlord's option the Renewal Term shall not commence and this Lease may expire as of the end of the Initial Lease Term or any applicable Renewal Term. Section 2.1.2. Upon the termination of this Lease, whether by forfeiture, lapse of time or otherwise, or upon termination of Tenant's right to possession of the Premises, Tenant will at once surrender and deliver the Premises, together with all improvements thereof, to Landlord, (but, except as otherwise provided in Part II, Section 1.2, specifically excluding Tenant's Equipment) in good condition and repair, reasonable wear and tear excepted. At the time of surrender, Tenant shall remove Tenant's Equipment; provided, however, that Tenant shall repair any injury or damage done to the premises which may result from such removal and shall restore the Premises to the same condition as existed prior to the installation thereof. Section 2.2. Right of First Refusal. During the Lease Term, Landlord shall not sell the Premises to a third party ("Third Party") at any time when this Lease is not in default unless and until (i) Landlord has received and, subject to Tenant's right of first refusal, accepted a bona fide written offer ("Offer") from Third Party containing the sales price and all of the terms and conditions upon which Landlord is willing to sell the Premises to Third Party, and (ii) Landlord has provided Tenant with a copy of the Offer. Section 2.2.1. If Tenant, within twenty (20) days after receipt of Landlord's written notice, gives Landlord written notice of its desire to purchase the Premises, Landlord and Tenant shall, within thirty (30) days after Landlord receives Tenant's notice, enter into a written purchase and sale agreement for Landlord's sale of the Premises to Tenant for the price, and on the terms and condition, set forth in the Offer. In the event Tenant wrongfully fails to close under said agreement, then the Tenant shall have no further rights under this Part II, Section 2.2. Section 2.2.2. If Tenant does not give Landlord its written notice within such twenty (20) day period, Landlord thereafter shall have the right to sell the Premises to Third Party on the terms and conditions set forth in the Offer, so long as the sale to Third Party closes within one hundred eighty (180) days after delivery of the Offer to Tenant. If such sale to Third Party does -16- 17 not close within the time period specified herein, then all of Tenant's first refusal rights stated in this Part II, Section 2.2 shall be reinstated with respect to such Offer and any and all subsequent offers. Section 2.3. Payment on Termination. Upon the termination of the Lease at the end of the Initial Lease Term or the Renewal Terms, as applicable, (a) Landlord shall reimburse Tenant for the cost less depreciation of (i) any and all capital improvements made to the Hospital at Tenant's expense and (ii) any Personal Property acquired by Tenant and used in connection with the operation of the Hospital, (b) Landlord will have the right to purchase from Tenant all, but not less than all, of Tenant's working capital then in use at the Hospital (which, for purposes hereof, shall specifically exclude all cash and cash equivalents) and (c) Landlord shall have the option, exercised in writing no later than sixty (60) days prior to the end of the Initial Term or the Renewal Terms, as applicable, to acquire Tenant's Equipment for a purchase price equal to the book value thereof less depreciation attributable thereto as reflected on Tenant's financial statements, in the case of any owned equipment, and assumption of any lease obligations outstanding with respect thereto, in the case of any leased equipment. The purchase price to be paid by Landlord for Tenant's working capital will be equal to the then current assets less the then current liabilities, which liabilities shall be assumed by Landlord using a form of Assignment Agreement similar to the Working Capital Assignment Agreement executed by Landlord and Tenant pursuant to the terms hereof. The purchase price for Tenant's working capital and/or Tenant's Equipment shall be payable in cash within 15 days after the end of the Initial Term or the Renewal Terms, as applicable. The then "Current Assets" shall include the net book value of Landlords inventories and supplies and accounts receivable but shall include cash and cash equivalents. Section 2.4. Licenses. Upon termination or expiration of this Lease, Tenant will: (a) surrender or transfer to Landlord, as appropriate, all licenses, certificates and permits associated with the Hospital; (b) transfer to Landlord all medical records, medical staff records, financial records and other books and records associated with the Hospital; and (c) immediately stop using the name "Parkview Regional Hospital" or any similar name. Section 3. Rent. Section 3.1. Basic Rent. During the Initial Lease Term the annual rent due hereunder (the "Basic Rent") shall be as follows: (i) From the Commencement Date until the completion of the Development Program (the "Completion Date") as evidenced by (i) the issuance of an unconditional Certificate of Occupancy from the City of Mexia and of all necessary licenses and permits to operate the same from the State of Texas and (ii) the certification of the project architect that the same is substantially complete subject only to the correction of approved punch list items, the annual Basic Rent shall be in the amount of Two Hundred Thousand and no/100 Dollars ($200,000), payable in equal monthly installments of Sixteen Thousand Six Hundred Sixty Six and 67/100 Dollars ($16,666.67). (ii) During the first Lease Year after the Completion Date, the annual Basic Rent shall be in the amount of Three Hundred Seventy Five Thousand and no/100 Dollars ($375,000) -17- 18 payable in equal monthly installments of Thirty One Thousand Two Hundred Fifty and no/100 Dollars ($31,250.00). (iii) During each subsequent Lease Year after the Completion Date, the annual Basic Rent shall be in an amount equal to the annual Basic Rent paid during the immediately preceding Lease Year increased by the lesser of (i) the percentage change in the Consumer Price Index (the "CPI") (as hereinafter defined) from the CPI in effect as of the first day of the immediately preceding Lease Year to the CPI in effect as of the first day of the current Lease Year and (ii) three (3%) per cent per annum; provided, however, in no event shall the Basic Rent payable in any Lease Year be less than the Basic Rent paid during the immediately preceding Lease Year. For purposes of this Part II, Section 3, a Lease Year shall be the twelve (12) month period commencing on the Completion Date. In the event the Commencement Date or the Completion Date shall be other than the first day of the month, Tenant shall pay to Landlord a pro rata portion of rent for the month. All annual rental payments shall be made in advance in equal monthly installments in the amounts specified and shall be paid on the fifth day of each month; provided, however, that the first monthly payment shall be due on the fifth day after the Commencement Date. For purposes of this Part II, Section 3, the CPI shall be the Consumer Price Index for Wage Earners and Clerical Workers, Dallas-Fort Worth SMSA: All Items (1982-1984=100), published by the Bureau of Labor Statistics (the "BLS"), or such other renamed index. If the BLS changes the publication frequency of the Cost of Living Index so that a Cost of Living Index is not available to make a cost-of-living adjustment, the adjustment to the rent provided for herein shall be based on the percentage difference between the Cost of Living Index for the closest preceding month for which a Cost of Living Index is available and the Cost of Living Index for the comparison month as required by this Lease. If the BLS changes the base reference period for the Cost of Living Index from 1982-84=100, the cost-of-living adjustment shall be determined with the use of such conversion formula or table as may be published by the BLS. If the BLS otherwise substantially revises, or ceases publication of the Cost of Living Index, then a substitute index for determining cost-of-living adjustments, issued by the BLS or by a reliable governmental or other nonpartisan publication, shall be reasonably selected by Lessor and Lessee. Section 3.2. Payment of Basic Rent. The Basic Rent shall be payable without offset, abatement or other deduction (including offsets resulting from any defaults by Landlord under any other agreement to which it or its affiliates and Tenant or its affiliates may be a party, unless expressly set forth herein) to Landlord at the address set forth in Part II, Section 16, or to such other person, firm or corporation at such other address as Landlord may designate by notice in writing to Tenant. Section 3.2.1. This Lease is intended to be triple net to Landlord, and Tenant shall pay to Landlord, net throughout the Initial Lease Term and any Renewal Term, the Basic Rent prescribed by Part II, Section 3.1, free of any offset, abatement, or other deduction, except as may be expressly set forth herein. Tenant is hereby obligated to make all rental payments set -18- 19 forth herein to Landlord. Landlord shall not be required to make any payment of any kind with respect to the Premises, except as may otherwise be expressly set forth herein and except for the payment of the principal and interest due on the mortgages and security instruments described in Exhibit "B." Accordingly, Tenant agrees to pay all additional rent payments described in Part II, Section 3.4.1 and all charges described in Part II, Section 6 as they become due and payable. Section 3.3. Late Charges. If any payment of any sums required to be paid or deposited by Tenant to Landlord under this Lease and payments made by Landlord under any provision hereof for which Landlord is entitled to reimbursement by Tenant shall become overdue for a period of ten (10) days beyond the date on which they are due and payable as provided for in Part II, Section 12.1.1. of this Lease, a late charge of one percent (1%) per month on the sums so overdue shall begin to accrue as of the expiration of said period and shall immediately be due and payable to Landlord, and said late charge shall be payable on the first day of the month next succeeding the month during which such late charge becomes payable. Such late charge shall compensate Landlord only for loss of interest on the payments due Landlord and shall be in addition to any and all other amounts, including damages, to which Landlord may be entitled pursuant to this Lease or in law or equity. The acceptance by Landlord of a late charge shall not limit or preclude Landlord from exercising its rights pursuant to Part II, Section 12. If non-payment of any late charge shall occur, Landlord shall have, in addition to all other rights and remedies, all rights and remedies provided for herein and by law in the case of non-payment of rent. No failure by Landlord to insist upon the strict performance by Tenant of Tenant's obligations to pay late charges shall constitute a waiver by Landlord of its rights to enforce the provisions of this Section in any instance thereafter occurring. Section 3.4. Additional Rent. Section 3.4.1. The additional rent shall consist of all real estate taxes, general and special assessments, personal property taxes, and other public charges which are assessed, levied, confirmed, or imposed upon the Premises during the Lease Term, and all sales taxes and other taxes that are now or hereafter may be payable in connection with the Basic Rent payable hereunder during the Initial Lease Term and any Renewal Term (other than income taxes owing by Landlord as a result of Tenant's payment of Basic Rent hereunder). Section 3.4.2. Any taxes and assessments relating to a fiscal period of any authority, a part of which is already included within the Initial Lease Term or any Renewal Term and a part of which is included in a period of time before or after the Initial Lease Term or any Renewal Term, shall be adjusted pro rata between Landlord and Tenant and each party shall be responsible for its pro rata share of any such taxes and assessments. Section 3.4.3. Nothing herein shall require Tenant to pay income taxes assessed against Landlord if and to the extent the same may hereafter be assessed against Landlord as a result of the existence of this Lease, it being specifically understood and agreed that as of the Commencement Date, no such taxes are assessed against Landlord. -19- 20 Section 3.4.4. Tenant may contest, in its own name or in the name of Landlord, with Landlord's cooperation, which Landlord agrees to give, the legality or validity of any such tax or assessment or of any law under which the same shall be imposed. This must be done in good faith, with due diligence, and at Tenant's own expense. If Tenant does so contest such tax or assessment beyond the time limit for payment thereof by Tenant, Tenant shall do one of the following: Tenant may pay such amount under protest; procure and maintain a stay of all proceedings with adequate bond to enforce collection of such tax or assessment; or deposit with Landlord reasonable security for the payment of all contested sums. Once such action is taken by Tenant, Tenant shall not be considered to be in default hereunder with respect thereto. Section 3.4.5. Tenant shall have, and Landlord hereby irrevocably grants to Tenant, the power and authority, at Tenant's cost to make and file and prosecute any statement or report or claim for refund which may be required or permitted by law, as the basis of or in connection with the assessment, determination, equalization, reduction or payment of any and every tax or assessment or license or charge which Tenant is required to pay or discharge hereunder. Section 3.4.6. Upon the termination of any such proceeding, Tenant shall pay the amount of such taxes and assessments or part thereof as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees, interest, penalties or other liabilities in connection therewith. Section 3.4.7. If any income, profits or revenue tax shall be levied, assessed or imposed upon the income, profits or revenue arising from rents payable hereunder, partially or totally in lieu of or as a substitute for real estate or personal property taxes imposed upon the Premises during the term of this Lease, then Tenant shall be responsible for the payment of such tax. Section 3.4.8. Tenant shall pay before delinquency any and all real and personal property taxes and assessments, payable hereunder by Tenant. In the event of a late payment, Tenant shall pay all interest and penalties plus the amount due. Tenant shall further provide Landlord with evidence of payment as soon as practicable after Landlord's written request therefor. Section 4. Use of the Premises/Compliance With Laws. Section 4.1.1. Tenant covenants upon execution of this Lease to use its best efforts to obtain all approvals needed to operate the Hospital under applicable state and federal law, including, but not limited to, certificate of need, licensure and certification, and, during the Initial Lease Term and any Renewal Terms, to operate the Hospital as a provider of health care services and to maintain its certification for reimbursement and its licensure and its JCAHO accreditation. Landlord agrees to assist Tenant as reasonably necessary to obtain such approvals. Tenant shall not amend or alter the Hospital license or certification without the prior written approval of Landlord, which shall not be unreasonably withheld. In addition, Tenant covenants and agrees that in connection with its operation of the Hospital it shall provide charity care in each Lease Year in a manner consistent with the past practices of the Hospital. For purposes hereof, charity care shall be deemed to be the care provided to patients who are determined under the Hospital's charity care policy in effect at the time of execution of this Agreement (Exhibit T) to otherwise -20- 21 pay for their care, it being the intent of the parties to provide hospital care and related services to residents of the Hospital's primary service area without regard to ability to pay. Section 4.1.2. Tenant covenants and agrees that it will return the Hospital to Landlord at the end of the Initial Lease Terms and/or any applicable Renewal Terms licensed and certified in the same manner as it is on the Commencement Date. Tenant shall provide at all times sufficient personnel, equipment and supervision to operate the Hospital safely and effectively and shall take such measures as are necessary (including disciplinary actions against, and termination of employment of, personnel where appropriate). Section 4.2. After the Commencement Date, Tenant shall neither use nor permit to be used the Premises, or any part thereof for any purpose or purposes other than as an acute care facility without the prior written consent of Landlord, which shall not be unreasonably withheld. No use shall be made or permitted to be made of the Premises, and no acts shall be done, which will cause the cancellation of any insurance policy covering the Premises or any part thereof, nor shall Tenant sell or permit to be kept, used or sold in or about the Premises any article which may be prohibited by the standard form of fire insurance policies. Tenant shall, at its sole cost, comply with all of the requirements pertaining to the Premises of any insurance organization or company necessary for the maintenance of insurance, as herein provided, covering the Premises. Section 4.3. Tenant covenants and agrees that the Premises shall not be used for any unlawful purpose. Tenant shall not commit or suffer to be committed any waste on the Premises, nor shall Tenant cause or permit any nuisance thereon. Tenant further covenants and agrees that Tenant's use of the Premises and maintenance, alteration, and operation thereof shall at all times conform to all applicable and lawful local, state, and federal ordinances, rules and regulations; including but not limited to the certificate of need, licensure and certification. Tenant may, however, contest the legality or applicability of any such ordinance, rule or regulation, or any licensure or certification decision. This must be done in good faith, with due diligence, without prejudice to Landlord's rights hereunder, and at Tenant's own expense. If Tenant does so contest any such ordinance, rule, regulation or decision, Landlord may require Tenant to deposit with Landlord reasonable security for the payment of all liability, costs, and expenses which may arise from the litigation. Once such a deposit has been made or while such a contest is pending, even if no such deposit is required by Landlord, Tenant shall not be considered in default under this Part II, Section 4.3. of the Lease. Section 4.4. Tenant shall neither suffer nor permit the Premises or the Hospital or any portion thereof to be used in such a manner as (i) might reasonably tend to impair Landlord's interest in the Premises or any portion thereof, or (ii) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Premises or any portion thereof. Section 4.5. Within ten (10) days after receipt of Landlord's written request therefor, Tenant shall deliver to Landlord a copy of the results of all surveys, investigations and inspections of the Hospital and its operation performed by state or federal authorities, including, but not -21- 22 limited to, notifications of actual or possible violations of state or federal law and regulations pertaining to the Hospital. Section 4.6. Tenant shall timely pay all Hospital payroll and related payroll taxes and impositions. Section 4.7 In connection with its operations at the Hospital, Tenant shall work with the Hospital's Governing Board established pursuant to Tenant's Bylaws, which Board shall be comprised of three members of the community served by the Hospital, two physicians with staff privileges at the Hospital and two officers or employees of Tenant and (ii) Tenant shall take such action as the Governing Board may deem to be necessary from time to time to monitor the satisfaction of the patients and community served by the Hospital and to take any action which is deems to be appropriate to address concerns raised by said patients and community members. The community members shall be selected as follows: one of the community members shall be appointed from a list of nominees recommended by the Hospital Board and two of the community members may, but shall not be required to, be appointed from said list of nominees. Section 5. Liabilities. Section 5.1 In consideration of the payment on the Delivery Date of an amount equal to the Excess Assets (as defined herein), Landlord hereby sells, assigns and transfers to Tenant all of the Hospital's working capital existing on the Commencement Date as reflected on the balance sheet attached hereto as Exhibit "G" (the "Working Capital"). Landlord and Tenant acknowledge and agree that the Working Capital does not include all of Landlord's assets or liabilities existing on the Commencement Date. For purposes hereof, the term "Excess Assets" shall mean the amount by which the current assets included in the Working Capital exceed the current liabilities included therein. For purposes hereof, the term "current assets" shall include the net book value of Landlord's inventories and supplies and accounts receivable but shall exclude cash and cash equivalents. Section 5.2 Landlord represents and warrants to Tenant that Landlord owns all of the assets sold to Tenant under Part II, Section 5.1 free and clear all liens, encumbrances, defenses or set-offs or charges of any nature whatsoever other than those liens described in Exhibit "B". Section 5.3 Tenant is not and is not to be deemed to be a successor of Landlord's business or operations at the Hospital. It is expressly understood and agreed that Tenant has not and does not assume or agree to assume any liability or obligation whatsoever of Landlord or of Hospital, except as expressly agreed to in writing by Tenant. Section 5.4 Tenant does hereby assume and agree to pay all of the current liabilities of the Hospital as of the Commencement Date as set forth on Exhibit "G-1". For this purpose, current liabilities means only those liabilities with a scheduled maturity date of less than 12 months. Landlord represents that the current liabilities will not exceed $1,450,000. -22- 23 Section 5.5. Tenant assumes and agrees to pay and perform Landlord's obligations under, but only to the extent such obligations accrue during the Lease Term, (i) the Operating Agreements set forth in Exhibit "D," and (ii) the equipment leases set forth on Exhibit "C." Section 5.6. In order to facilitate the transfer of operational responsibility for the Hospital to Tenant and to enable Tenant to continue to operate the Hospital under Landlord's Medicare and Medicaid provider numbers, Tenant agrees to assume responsibility for all claims under Medicare or Medicaid, including payments of any amounts in excess of the amounts shown as due to Medicare or Medicaid on Landlord's Balance Sheet or by any third party payor for recapture of depreciation, cost report settlements, charges, billings or other amounts arising out of operation of the Hospital prior to the Commencement Date or the termination of Landlord's operations at the hospital, subject to Landlord's agreement that, as between Landlord and Tenant, Landlord shall be obligated to reimburse Tenant for any amounts paid by it pursuant to this Part II, Section 5.6 together with interest at the rate of 12 percent per year until paid in full; provided, however, that Landlord's failure to so indemnify Tenant shall not affect Tenant's obligations hereunder to Medicare and Medicaid and the appropriate fiscal intermediaries. Landlord hereby grants Tenant the right, but not the obligation, to appeal all Medicare, Medicaid, or other third payor decisions related to periods prior to the Commencement Date. Tenant will remit to Landlord any recovery under such appeal or appeals, after deducting all costs incurred and any amounts which are the subject of the indemnity provisions of the immediately preceding sentence and which have not been paid by Landlord to Tenant as and when due. Section 5.7. Without limiting Part II, Section 5.3, Tenant specifically does not assume any of the following liabilities (collectively, the "Excluded Liabilities"): Section 5.7.1. Malpractice liability for any action, failure to act or event occurring prior to the Commencement Date. Section 5.7.2. Obligations or liabilities to employees of Landlord under any employment benefit plans, except for accrued amounts included as current liabilities under Part II, Section 5. 4. Section 5.7.3. Any other liability, claim, cost, debt or obligation, whether liquidated or unliquidated contingent or otherwise, not expressly assumed by Tenant in writing, including, but not limited to, those set forth in Exhibit "S." Section 5.8. Landlord will promptly pay all Excluded Liabilities as the same become due. If Landlord fails to pay an Excluded Liability within 10 days after request by Tenant, Tenant may pay the same. Landlord will promptly reimburse Tenant for such amounts together with interest at the rate of 12 percent per year until paid in full. The unreimbursed balance of the Excluded Liabilities paid by Tenant together with interest thereon is referred to herein as the "Excluded Liabilities Account." Upon expiration or termination of this Lease for any reason (other than the purchase of the Hospital by Tenant pursuant to its right of first refusal granted under this Lease or otherwise), Landlord will pay the then existing balance of the Excluded Liabilities Account - 23 - 24 within 15 days after the expiration or termination. Any amounts not paid will be treated in the same manner as other unpaid amounts in accordance with Part II, Section 2. 3. Section 6. Maintenance. Repair. Alterations and Utilities. Section 6.1. Tenant shall, at its own cost, and without expense to the Landlord, keep and maintain the Premises, including all sidewalks, buildings, surface parking lots and improvements of any kind which may be a part thereof in good, sanitary and neat order, condition and repair, ordinary wear and tear and obsolescence in spite of repair and acts of God excepted, and, except as specifically provided in Part II, Section 10, below, restore and rehabilitate any of the Premises which may be destroyed or damaged by fire, casualty or cause whatsoever and in such a manner as may be necessary to operate the Hospital in accordance with applicable state and/or federal laws or regulations. Tenant shall perform all interior and exterior painting, and maintain the grounds of the Hospital in a good and sightly appearance. Tenant shall be obligated during the Lease Term to make any repairs, replacements or renewals of any kind, nature or description whatsoever to the Premises. Section 6.2. For changes, alterations or additions to the Premises in excess of $50,000.00 after the Commencement Date, other than the changes, alterations and additions included in the Development Program, Tenant shall obtain the prior written consent of Landlord, which shall not be unreasonably withheld, except as hereinafter provided. Further, Tenant shall make any and all alterations required by applicable state and/or federal laws or regulations, without the need to first obtain Landlord's consent thereto regardless of the cost thereof. Landlord acknowledges and agrees under Part II, Section 2.3, Landlord is obligated to reimburse Tenant at the expiration of the Initial Lease Term or any Extended Term, as applicable, for the cost less depreciation of any changes, alterations or additions to the Premises which constitute capital improvements thereto. Section 6.3. Tenant shall pay all charges for water, electricity, gas, sewage, waste, trash and garbage disposal, telephone, cable television, and other services furnished to the Premises from and after the Commencement Date. Section 7. Liens Against the Premises. Section 7.1. Tenant will not permit the Premises to become subject to any lien, charge, or encumbrance as a result of work performed by or at the request of Tenant, including the work included in the Development Program. Tenant shall maintain the Premises free from all orders, notices, and violations filed or entered by any public or quasi-public authorities. Notwithstanding the foregoing, in the event any such lien, charge, or encumbrance is imposed, Tenant may contest any such lien, charge, encumbrance, order, notice or violation. This must be done in good faith, with due diligence and at Tenant's own expense and Tenant shall not be considered in default of the provisions of this Part II, Section 7.1. as a result of such contest, provided Tenant posts adequate bond with the court or, upon Landlord's request, deposits with the Landlord reasonable security for the payment of all contested sums. - 24 - 25 Section 7.2. Should a judgment on any lien, charge, encumbrance, order, notice or violation be rendered against the Premises and should Tenant fail to discharge such judgment or take action to protest such judgment, Landlord shall have the right but not the obligation to discharge said judgment. If Landlord exercises that option, any amounts paid by Landlord shall be due from Tenant as additional rent. Such additional rent shall be due and payable on the next date after the expense is incurred that Basic Rent is otherwise due. Section 7.3. Tenant shall take all reasonable steps necessary to ensure that no lien arising under Texas Mechanic's or Materialman's Law as a result of construction done at the Premises at Tenant's request, shall extend to the interest of Landlord in the Premises. Tenant shall pay all costs incurred by Tenant in connection with the construction, alteration, demolition, maintenance and repair of any and all improvements on the Premises. Should a lien or claim of lien be filed against the Landlord's or Owner's interest in the Premises by any contractor, subcontractor, mechanic, laborer, materialman or any other person whomsoever retained by Tenant, Tenant shall, within sixty (60) days after the filing thereof, cause the same to be discharged of record. Section 8. Non-Liability and Indemnification. Section 8.1. During the Lease Term, Tenant agrees to protect, indemnify and save harmless Landlord from and against all claims arising out of or connected with the use, occupancy and condition of the Premises and shall pay all costs and expenses incurred by Landlord in connection with such claims, including without limitation, court costs and reasonable attorney's fees for trial and appellate proceedings. Landlord shall be protected hereby from all claims arising during the Lease Term from loss of or damage to property, or death or injury to persons except to the extent such loss, damage, death or injury is caused by the negligence or willful actions of Landlord or from the acts or omissions of Landlord or Landlord's tenant prior to the Commencement Date. Section 8.1.1. Landlord agrees to protect, indemnify and save harmless Tenant, including the members, managers, employees and agents of Tenant and their successors and assigns, from and against all claims arising out of or connected with its use, operation, and occupancy of the Premises prior to the Commencement Date or a breach by Landlord of any of its representations, warranties and covenants set forth herein, and Landlord shall pay all costs and expenses incurred by Tenant in connection with such claims, including without limitation, court costs and reasonable attorneys' fees for trial and appellate proceedings. In furtherance of Landlord's indemnity obligations hereunder, Landlord agrees to keep available $150,000 of cash until the later of (i) one year after the Delivery Date or (ii) the final non-appealable resolution of any claims for indemnity made by Tenant during said one year period. Section 9. Insurance. Section 9.1. During the term of this Lease, Tenant shall at all times keep the Premises insured with the kinds and amounts of insurance described below through an insurance carrier qualified to do business in the state of Texas which is reasonably acceptable to Landlord. The policies must name Landlord as a named insured or loss payee as their interests may appear and - 25 - 26 must provide that no policy will be cancelled or terminated in any way without not less then 10 days prior written notice to Landlord. Losses shall be payable to Landlord and Tenant in the manner set forte in Part II, Section 10.1 herein. Any loss adjustment shall require the written consent of Landlord and Tenant. Evidence of insurance shall be deposited with Landlord. The policies on the Premises shall insure against the following risks: Section 9.1.1. Loss or damage by fire and such other risks as may be included in the broadest form of extended coverage insurance from time to time available (which shall include the effects of floods and hurricanes if the Premises are located in a designated flood plain area) in amounts sufficient to prevent Landlord or Tenant from becoming a coinsured within the terms of the applicable policies and in any event in an amount not less than one hundred percent (100%) of the then full replacement value thereof (as defined below in Part II, Section 9.2.); Section 9.1.2. Loss or damage from leakage of any sprinkler system now or hereafter installed in the Hospital on the Premises; Section 9.1.3. Loss or damage by explosion of steam boilers, pressure vessels or similar apparatus, now or hereafter installed in the Hospital, in such limits with respect to any one accident as may be reasonably requested by Landlord from time to time; Section 9.1.4. Business interruption insurance covering the risk of loss during the reconstruction resulting from the occurrence of any of the hazards described in Part II, Sections 9.1.1., 9.1.2. or 9.1.3. in an amount sufficient to pay the rental required under this Lease for a period of 6 months; Section 9.1.5. Claims for personal injury or property damage under a policy of general public liability insurance with combined single limits in respect of bodily injury and property damage of not less than One Million and no/100 Dollars ($1,000,000) per occurrence and annual aggregate limits of not less than Three Million and no/100 Dollars ($3,000,000). If obtainable at a reasonable cost, the public liability insurance shall be on an as occurrence basis as opposed to a claims made basis; Section 9.1.6. Professional liability insurance insuring Tenant and Landlord in amounts and against the risks ordinarily insured by standard professional liability insurance available to the hospitals, but in no event less than One Million Dollars ($1,000,000) per occurrence and annual aggregate limits of not less then Three Million Dollars ($3,000,000); Section 9.1.7. Claims for employee injuries covered by worker's compensation in accordance with the requirements of Texas law, provided that Tenant may self-insure if duly qualified in accordance with Texas law or with the consent- of the Landlord elect to operate the Hospital without worker's compensation insurance to the extent permitted by Texas law; and Section 9.1.8. Such other hazards and in such amounts as may be customary for comparable properties in the area. - 26 - 27 Section 10.1. All proceeds payable by reason of any physical loss of any of the improvements comprising the Premises and insured under any policies of insurance required by this Lease shall be held in trust by Landlord and (subject to Part II, Section 10.2.) shall be available for the reconstruction or repair, as the case may be, of any damage to or destruction of the Premises and shall be paid out by Landlord from time to time for the reasonable cost of such work. Any excess of money received from insurance remaining with the Landlord after the restoration or reconstruction of the Premises shall be paid to Tenant free and clear upon completion or restoration or reconstruction. Any shortfall shall be the Tenant's responsibility. All salvage resulting from any such loss covered by insurance shall belong to Landlord. Section 10.2. In the event any improvements comprising the Hospital, the Premises or the Personal Property are damaged by peril covered by insurance or required to be covered by insurance in accordance with the terms hereof, Tenant shall commence to rebuild the same within sixty (60) days after the proceeds of any insurance become available and pursuant to plans and specifications prepared by Tenant and approved by Landlord within said sixty (60) day period, and Tenant shall proceed with all due diligence to complete said restoration within a commercially reasonable period of time unless Tenant is not obligated to rebuild in accordance with Part II, Section 10.2.1 below. Any repair or restoration shall be undertaken by Tenant in such a manner as to ensure that upon its completion the Hospital is of the same standard and quality as prior to the damage or destruction. Section 10.2.1. Tenant shall not be obligated to rebuild if the repairs or reconstruction of the damage cannot be made under existing laws, ordinances, statutes or regulations of any governmental authority applicable thereto in which case this Lease shall terminate effective thirty (30) days after the damage occurs and all insurance proceeds with respect to the Premises shall be payable to and retained by Landlord, free of any claims by Tenant; provided, however, Tenant shall be entitled to retain any business interruption proceeds payable with respect to such loss. Section 10.3. In the event any damage occurs which renders the Hospital unsuitable for use as an acute care facility and no insurance coverage against the loss was required under the terms hereof and Tenant did not otherwise elect to maintain such insurance, Landlord may, at its election, either terminate this Lease or elect to rebuild or repair the damage so incurred provided that unless Landlord notifies Tenant in writing within thirty (30) days after such damage as to which election it makes, Landlord shall be deemed to have elected to terminate this Lease. In the event of such an uninsured loss which does not render the Hospital unsuitable for use as an acute care facility, Landlord shall be required to rebuild or repair the damage so incurred. Any replacement or repairs performed by Landlord pursuant to this Part II, Section 10.3 shall be commenced within sixty (60) days of the date of election by Landlord, but not later than one hundred twenty (120) days after the loss. In the event Landlord does not elect to rebuild or repair, this Lease shall automatically terminate as provided in Part II, Section 10.2.1 above. In the event Landlord elects not to rebuild the Hospital pursuant to this Part II, Section 10.3 and it is determined to be in the best interests of the patients to be transferred from the Hospital as a result of the damage thereto, Tenant shall be entitled to transfer the patients of the Hospital to any other facilities operated by it or its affiliates to which said patients are willing to move. - 28 - 28 Section 10.4. In the event Tenant or Landlord, as appropriate, is not obligated or does not elect to rebuild or repair, Tenant shall promptly, at its own expense, remove from the Premises any of Tenant's Equipment not so damaged or destroyed, subject to Landlord's right to acquire the same pursuant to Part II, Section 2.4. Section 10.5. For the purposes of this Part II, Section 10, the Hospital shall be deemed to have been rendered unsuitable for use as an acute care facility if, in the good faith judgment of Tenant and Landlord, reasonably exercised, after any such loss the Hospital cannot be operated on a commercially practicable basis as an acute care facility of the type and quality existing and licensed immediately prior to such loss, taking into account, among other relevant factors, the number of licensed and operational beds affected by such loss. Section 10.6. This Lease shall remain in full force and effect and Tenant's obligation to make rental payments and to pay all other charges required by this Lease shall remain unabated during the first six (6) months of any period of repair or reconstruction, but thereafter, assuming the reconstruction has been commenced and is being diligently pursued by Tenant and the failure to complete the restoration is through no fault of Tenant, rental payments shall be abated to the extent that is fair, just and equitable to both Tenant and Landlord, taking into consideration, among other relevant factors, the number of licensed beds rendered unusable by such loss or damage. Section 11. Condemnation. Section 11.1 If, during the Lease Term, so much of the Premises are taken or condemned for a public or quasi-public use that the Premises are rendered unsuitable for use as an acute care facility, this Lease shall terminate. Termination will be effective without entry or notice. Termination shall occur as of the day when possession is required to be surrendered to the taking or condemning authority. Section 11.2. If, during the term of this Lease, a portion of the Premises and/or the Hospital is taken or condemned in fee for a public or quasi-public use such that the Hospital is not rendered unsuitable for use as an acute care facility, this Lease shall not terminate. If, however, as a result of the taking, the number of beds available for operation of the Hospital as an acute care facility of the type and quality existing and licensed prior to the taking has been or must be reduced, Tenant shall be entitled to an abatement of rent. The rent abatement shall be to the extent that is fair, just and equitable to both Tenant and Landlord, taking into consideration, among other relevant factors, the number of licensed beds rendered unusable by such loss or damage. Section 11.3. All damages awarded in connection with the taking of the Premises shall vest in Landlord. All damages awarded in connection with the taking of the leasehold estate and Tenant's Equipment shall vest in Tenant. Section 11.4. For purposes of this Part II, Section 11, the Premises shall be deemed to have been rendered unsuitable for use as an acute care facility if, in the good faith judgment of - 29 - 29 Landlord and Tenant reasonably exercised, after any such loss the Premises cannot be operated on a commercially practicable basis as an acute care facility of the type and quality existing and licensed immediately prior to such loss, taking into account, among other relevant factors, the number of licensed beds. Section 12. Default. Section 12.1. The occurrence of any of the events, acts or circumstances described in Part II, Sections 12.1.1. and 12.1.2. shall constitute an Event of Default under this Lease. Section 12.1.1. Failure by Tenant to pay in full any rent payable under this Lease when due, and the continuance of such failure for ten (10) days. Section 12.1.2. Failure by Tenant to observe, perform or comply with any of the terms, covenants, agreements or conditions contained in this Lease (other than as specified in Part II, Section 12.1.1 or Section 12.1.6), and the continuance of such failure for thirty (30) days after Landlord has given Tenant notice of such failure. If Tenant has promptly commenced and diligently pursued remedial action within said thirty (30) day period but has been unable to cure its default (except for any default that can be reasonably cured by the payment of money) prior to the expiration thereof, said thirty (30) day period shall be extended for the minimum time reasonably required for the completion of Tenant's remedial action. Notwithstanding the foregoing, in the event any such failure of performance by Tenant is deemed to pose a substantial risk of harm to the patients of the Hospital or to the licensure or certification status or JCAHO accreditation of the Hospital, Tenant shall be required to cure such failure within a period of time as may be established by the state or federal authority having jurisdiction over the Hospital or, if no such time frame is established, as soon as is reasonably practicable, but in no event within more than one week from the determination of the existence of such condition; provided, however, that in the event Landlord is not satisfied that the Tenant is undertaking such cure within one half of the time allocated by such authority or by the terms hereof, then Landlord shall have the right to enter into the Hospital and to undertake the completion of such cure, in which case Landlord shall have no liability to Tenant with respect thereto except for liability which Tenant incurs as a result of the Landlord's negligence or wrongful misconduct in undertaking such cure. Section 12.1.3. The making by Tenant or any guarantor of this Lease of an assignment for the benefit of its creditors or the commencement of proceedings in a court of competent jurisdiction for the reorganization, liquidation or involuntary dissolution of Tenant of any guarantor of this Lease or for the adjudication of either such party as a bankrupt or insolvent or for the appointment of a receiver of the property of either such party, which proceeding are not dismissed and any receiver, trustee or liquidator appointed therein is not discharged, within sixty (60) days after the institution thereof. Section 12.1.4. The abandonment of the Premises by Tenant other than as a result of the damage or destruction or taking thereof. - 30 - 30 Section 12.1.5. The levying of a writ of execution or attachment on or against the property of Tenant or any guarantor of this Lease which is not discharged or stayed by action of said party contesting the same within sixty (60) days after such levy or attachment and/or the sale of the interest of Tenant in the Premises under such a writ of execution or attachment. Section 12.1.6. If (i) any government agency having jurisdiction over the Hospital revokes or terminates any license required for the operation of the Hospital as a licensed acute care facility; (ii) there is any involuntary decertification of the Hospital from participation in any state or federal reimbursement program; or (iii) there is any action taken by a state or federal agency which results in the removal of patients from the Hospital as a result of deficiencies cited by said agency in the care rendered by Tenant at the Hospital. Section 12.1.7. If there is any generation, disposal, release or use of any hazardous substance upon or from the Premises other than in compliance with applicable laws and regulations. Section 12.2. Upon the occurrence of any Event of Default, Landlord, in addition to the other rights or remedies it may have, shall have the option at any time thereafter to pursue any one or more of the following remedies without any notice or demand whatsoever: (i) the immediate right of re-entry; (ii) enter upon the Premises and repossess any equipment, furniture, fixtures, or other personalty encumbered by a lien or security interest in favor of Landlord and sell such personalty in the manner as provided in this Lease; (iii) alter any and all locks and other security devices restricting access to the Premises; and (iv) exercise any and all other rights or remedies given hereunder or available to Landlord at law or in equity. Section 12.2.1. Should Landlord elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings or pursuant to any notice provided for by law, Landlord may either terminate this Lease or it may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms, which may be for a term shorter than or for a term extending beyond the Lease Term, and at such rental or rentals and on such other terms and conditions as Landlord, in its reasonable discretion, may deem advisable. In the event that Landlord relets all or a portion of the Premises, the rents actually received by Landlord shall be applied as follows: first, to the payment of any cost or expense incurred by Landlord for which Tenant is liable; second, to the payment of any indebtedness, other than rent, due to Landlord from Tenant; third, to the payment of all past due rent and any other amounts then due and payable by Tenant under this Lease; and fourth, to any other amounts payable by Tenant hereunder. Any net amounts received by Landlord as a result of reletting in excess of the amounts payable by Tenant hereunder shall be remitted by Landlord to Tenant. Section 12.2.2. Should Landlord at any time terminate this Lease as a result of any Event of Default, in addition to any other remedy it may have, Landlord may recover from Tenant all damages incurred by reason of such Event of Default, including the cost of recovering the Premises. -31- 31 Section 12.2.3. Whether or not Landlord elects to terminate this Lease, Landlord may terminate Tenant's right to possession of the Premises by any lawful means, in which case all of Tenant's rights in this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. Possession of the Premises includes but is not limited to possession of all Personal Property, patients, patient records, Hospital business records, general intangibles and proceeds. If Landlord elects to terminate this Lease or terminate Tenant's right to possession of the Premises, Tenant shall immediately vacate the Premises. If Tenant fails TO immediately vacate the Premises, Landlord may, without prejudice to any other right or remedy and without being deemed guilty of trespass and with or without resort to legal process, immediately enter upon and take possession of the Premises and expel or remove Tenant or any other person occupying the Premises (other than the patients and any third party operators of departments within the Hospital who are not affiliates of Tenant) and any property found within the Premises. To the extent permitted by law, Tenant hereby waives (i) any notice of Landlord's intent to re-enter or retake possession, (ii) any notice provided by statute or otherwise of such re-entry or repossession or the changing of locks, (iii) any claim or cause of action, whether based upon trespass, conversion, or otherwise, against Landlord for any damages caused by the alteration of any locks or any re-entry, or repossession by Landlord, except if by the negligence or wilful misconduct of Landlord or otherwise, and (iv) any right of redemption, re-entry or repossession of Tenant and any notice of legal proceedings for re-entry, including any actions in forcible entry and detainer. Tenant shall have no right to re-enter the Premises or to obtain any key to the Premises until Tenant cures all Events of Default hereunder and pays all amounts owing to Landlord hereunder, including any late charges, as a result of said Event of Default. Section 12.2.4. Any termination of this Lease by Landlord shall not in any event terminate Tenant's obligation to pay rent and other amounts owed by Tenant pursuant to this Lease for the full Lease term. Upon the occurrence of an Event of Default, Landlord shall have the right to recover from Tenant the following: (a) the worth, at the time of the award, of the unpaid Basic Rent that had been earned at the termination of this Lease; and (b) the worth, at the time of the award, of the amount by which the unpaid Basic Rent that would have been earned after the date of termination of this Lease until the time of the award exceeds the amount of the loss of rent that Tenant proves could have been reasonably or has actually been avoided by Landlord; and (c) the worth, at the time of the award, of the amount by which the unpaid Basic Rent for the balance of the Lease Term after the time of the award exceeds the amount of the loss of rent that Tenant proves could have been reasonably or actually has been avoided by Landlord; and (d) any other amount, and court costs and reasonable attorneys' fees, necessary to compensate Landlord for all detriment and damage proximately caused by Tenant's default. -32- 32 The worth at the time of the award as used in (a) and (b) of the preceding sentence is to be computed by allowing interest at the maximum rate permitted by law (or 12% per annum if there is no maximum rate). The worth at the time of the award as referred to in (c) above is to be computed by discounting the amount at the annual discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus 1%. Section 12.3. No remedy herein conferred upon or reserved to Landlord or Tenant is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given under this Lease or now or hereafter existing at law or in equity or by statute. No delay or omission to exercise any right, remedy, or power accruing upon any Event of Default shall impair any such right, remedy or power or shall be construed to be a waiver thereof unless and until such Event of Default has been cured. No waiver by Landlord of any provision of this Lease or any breach by Tenant of any obligation of Tenant hereunder shall be deemed to be a waiver of any provision hereof or of any subsequent breach by Tenant of the same or any other provisions hereof. Neither the acceptance of rent by Landlord following the occurrence of an Event of Default by Tenant (whether known to Landlord or not) nor any custom or practice followed in connection with this Lease shall constitute a waiver by Landlord of such Event of Default or any other Event of Default. Landlord's consent to any act by Tenant shall not be deemed to render unnecessary the obtaining of Landlord's consent to any subsequent act of Tenant. From and after the occurrence of an Event of Default, any payments received by Landlord from Tenant may be applied by Landlord to any rent or other amounts owing by Tenant to Landlord hereunder, at Landlord's sole discretion. Section 12.4. In addition to any other remedy provided in this Lease, from and after the occurrence of an Event of Default and during the continuance thereof Landlord shall be entitled, to the extent permitted by applicable law, to injunctive relief or appointment of a receiver, or both without the necessity of proving the inadequacy of any legal remedy or irreparable harm. The rights and remedies of Landlord as provided herein shall be enforceable to the maximum extent not prohibited by applicable law, and the unenforceability of any portion thereof shall not thereby render unenforceable any other portion. Any injunction or temporary restraining order issued prior to a final hearing may enjoin Tenant, its officers, agents and employees and those in active concert or participation with them, from removing from the Premises any patients, patient records, equipment, furniture, fixtures, Hospital business records, monies and other things related in any way to Tenant's business at the Hospital; provided, however, that the receiver may only apply such monies in accordance with the order of the court. The receiver shall have all powers and duties necessary and reasonable to conduct Tenant's business at the Hospital until this Lease is terminated. Responsibility for the costs associated with the appointment of a receiver shall be determined by the court. Section 12.5. The exercise by Landlord of any one or more of the remedies granted herein or otherwise available at law or in equity shall not be deemed to be an acceptance of surrender of the Premises, whether by agreement or by operation of law. Landlord and Tenant agree that a surrender of the Premises can be effected only by an agreement in writing between Landlord and -33- 33 Tenant. No act or omission of Landlord shall be construed as an election by Landlord to terminate this Lease unless Landlord gives written notice of termination to Tenant. Section 13. Landlord's Right to Perform Tenant's Covenants. Section 13.1 If Tenant defaults in the making of any of the payments, or the performance of any of the obligations provided for in this Lease, Landlord may, at its option and on behalf of Tenant, make any such payments or perform any such obligations. Section 13. 2. Before exercising that option, however, Landlord must give Tenant written notice of Tenant's default and of Landlord's intention to correct that default. If thirty (30) days after such notice, or such shorter time period as Landlord may specify in the notice if further delay would impair materially any substantial right, property, or benefit of Landlord, Tenant has not corrected such default, Landlord may exercise its rights under this Part II, Section 13. Section 13.3. In the event Landlord performs any obligation on Tenant's behalf, Tenant shall reimburse Landlord for any amounts reasonably paid or expended. This reimbursement shall be due and payable on the next rent payment date after the expense is incurred that rent is otherwise due. Landlord shall not be held liable or in any way responsible for any loss, inconvenience, annoyance or damage resulting to Tenant on account of such performance by Landlord, unless Landlord is found to have been negligent or engaged in willful misconduct in its performance. All amounts payable by Tenant to Landlord under any of the provisions of this Lease, if not paid when the same become due as in this Lease provided, shall bear interest from the date they become due until paid, at the prime rate of interest published in the Wall Street Journal, but in no event at a rate which would be deemed to be usurious under Texas law. In the event that the Wall Street Journal ceases or fails to publish or announce a prime rate, the amounts due hereunder shall bear interest at the prime rate announced by the bank designated by Landlord, provided such a bank is among the top twenty-five (25) banks in the United States in terms of deposits. Section 14. Quiet Enjoyment. Section 14.1. Landlord covenants and agrees that, so long as Tenant observes and performs all of the covenants, conditions, and stipulations of this Lease, Tenant may lawfully and quietly hold, occupy and enjoy the Premises during the Lease Term. Section 14.2. In the event that an order is entered by a court of competent jurisdiction ruling that either (a) this Lease or the continued leasing of the Hospital to Tenant was or would be in violation of applicable law (other than any matter described in clause (c) on page 6 hereof), or (b) Landlord lacked the full power and authority, including without limitation the absence of any necessary approvals, to enter into and perform its obligations under this Lease, in either case then in addition to the other remedies of Tenant at law, in equity or pursuant to the provisions of this Lease, the Tenant may terminate this Lease upon ten (10) days written notice of termination to Landlord. -34- 34 Section 15. Assignment and Subletting. Section 15.1. Tenant may, without prior approval from Landlord, sublease the Premises or assign its rights and obligations under this Lease to any Affiliate of Tenant or the Affiliate of any member of Tenant without novation of Tenant, unless Landlord specifically consents in writing to such a novation, which consent shall not be unreasonably withheld. For purposes of this Lease, an "Affiliate" of a specified entity is an entity which directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified entity. For purposes of this definition, "control" means either (i) the ownership, directly or indirectly, of 50% of the ownership interest in the relevant entity, or (ii) the ability, directly or indirectly, to appoint 50% of the governing board of the relevant entity by virtue of any ownership interest, a member interest, a membership interest, by right of contract or any other means. Before any such assignment shall be valid, the assignee shall assume in writing and agree to be bound by all of the terms and conditions of this Lease as if named the Tenant herein; provided, however, that a subsequent sale or other conveyance by Tenant of the stock or beneficial ownership (direct or indirect) of said Affiliate, other than to itself or another Affiliate, shall be deemed to be an assignment for which Landlord's consent is required in accordance with the terms of Part II, Section 15.2, below. A change in the ownership of the stock of Tenant's parent corporation or a sale by Tenant's parent corporation of its assets, including its stock in Tenant, shall not be deemed to be an assignment of this Lease. Section 15.2. Tenant shall give Landlord notice of any assignment or subletting pursuant to Part II, Section 15.1, and shall give to Landlord, concurrently with such assignment, an executed original assignment agreement wherein such assignee agrees to be bound by the terms and conditions of this Lease. Section 15.3. Tenant may sublease the Premises or assign its rights and obligations under this Lease to a person or entity that is not an Affiliate with the prior written consent of Landlord which consent shall not be unreasonably withheld if the proposed assignee satisfies any and all conditions with respect to an assignment by the Lessee which may be set forth in the documents evidencing the Loan. No such assignment will, however, release Tenant from its obligations under this Lease, however, before any such assignment shall be valid, the assignee shall assume in writing and agree to be bound by all of the terms and conditions of this Lease as if named the Tenant herein. Notwithstanding the foregoing, Tenant shall have the right, without Landlord's consent, to assign or mortgage this Lease and its rights and obligations hereunder, including, but not limited to, its rights with respect to any accounts receivable generated from its operations at the Hospital, as collateral for a working capital loan secured by Tenant or its parent corporation, the proceeds of which are used in whole or in part by Tenant in connection with its operations at the Hospital. Section 15.4. Landlord may at any time assign its rights and obligations under this Lease, provided, however, that Landlord shall furnish to Tenant a written statement from Landlord's assignee that such assignee recognizes all of Tenant's rights under this Lease. Notwithstanding the failure of Landlord to obtain said recognition from Landlord's assignee, any assignment of Landlord's rights and obligations shall be subject to Tenant's rights under this Lease. -35- 35 Section 15.5. No assignment or subletting that is approved pursuant to this Part II, Section 15 shall be deemed to remove any subsequent assignment or subletting from the provisions of this Part II, Section 15, it being the intent hereof that every assignment and subletting, whenever occurring, shall require the same approval as is set forth herein for an original assignment or subletting. Section 16. Notices. Section 16.1. All notices provided for in this Lease or related to this Lease shall be in writing and shall be delivered to the parties at the addresses set forth below. All such notices or other papers or instruments related to this Lease shall be deemed sufficiently served or delivered on the date of mailing, provided that they are sent by United States Registered or Certified Mail, postage prepaid, in an envelope properly sealed or on the date of receipt if hand delivered or sent by overnight courier or facsimile transmission: To Landlord: Parkview Regional Hospital, Inc. 312 East Glendale Street Mexia, Texas Facsimile Number: 817-562-2331 Attn: Chairman of the Board with copy to: Davis & Wilkerson 600 Congress, Suite 200 Austin, TX 78701 Facsimile Number: 512-482-0342 Attn: Kevin Reed To Tenant: Brim Hospitals, Inc. 305 NE 102nd Avenue Portland, OR 97220 Facsimile Number: 503-254-7619 Attn: John Miller with copy to: The Nathanson Group 1411 Fourth Avenue, Suite 905 Seattle, WA 98101 Facsimile Number: 206-623-1738 Attn: Randi S. Nathanson Section 16.2. Both Landlord and Tenant may change the address or the name of the addressee applicable to subsequent notices by giving notice as provided above. However, notice of such a change shall not be effective until the fifth day after mailing. -36- 36 Section 17. Miscellaneous. Section 17.1. The captions in this Lease are for convenience of reference only. In no way do those captions define, limit or describe the scope or intent of this Lease. Section 17.2. Words showing number shall be taken to include both the singular and the plural forms. Words showing gender shall be taken to include masculine, feminine and neuter. Section 17.3. Subject to the restrictions on transfers set forth herein, this Lease shall inure to the benefit of and be binding upon Landlord and Tenant and their respective successors and assigns. The definition of "Landlord" and "Tenant" herein refer to the Landlord and Tenant at the time in question. Section 17.4. This Lease shall be governed, construed, and enforced in accordance with the laws of the State of Texas and venue of any action arising under this Agreement shall be proper in Dallas County, Texas. Section 17.5. This Lease represents the entirety of the agreement among the parties hereto with respect to the subject matter hereof and shall be deemed to supersede any prior discussions or agreements among the parties hereto. This Lease may not be amended or modified except by written instrument signed by the parties hereto. Landlord and Tenant agree to enter into such mutually acceptable amendments hereto as may be necessary to incorporate any covenants or other amendments required by the terms of the documents evidencing the Loan. Section 17.6. The failure of either party to insist upon strict performance of any of the covenants, agreements, terms and conditions of this Lease in any one or more instances shall not be construed as a waiver or relinquishment of any such covenant, agreement, terms, or condition and the same shall remain in full force and effect. Section 17.7. In the event either party brings an action to enforce any of the terms hereof or in connection herewith, the prevailing party in such action shall be entitled to and the losing party agrees to pay the reasonable attorneys' fees and expenses, including attorneys' fees and expenses of appellate proceedings, of the prevailing party. Section 17.8. Landlord and Tenant shall execute a Memorandum of this Lease in a form acceptable to Landlord and Tenant. The Memorandum shall be recorded in the public records of Limestone County, Texas. Landlord and Tenant shall share the cost of recording. Section 17.9. Each term and provision of this Lease shall be enforced to the fullest extent permitted by law. Should any term or provision of this Lease, or the application thereof, prove illegal or unenforceable, the remainder of this Lease shall still be valid and enforced. Section 17.10. Landlord and Tenant each represent to the other that there are no claims for brokerage or other commissions or finder's or other similar fees in connection with the -37- 37 transactions contemplated by this Lease insofar as such claims shall be based on arrangements or agreements made by or on behalf of the party so representing. Section 17.11. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the parties hereto. Section 17.12. This Lease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument. Section 17.13 No provision of this Lease shall be construed against or interpreted to the disadvantage of either Landlord or Tenant by any court or other governmental or judicial authority by reason of such party's having or being deemed to have structured, written, drafted or dictated such provisions. Section 17.14. Time is of the essence of this Lease. Section 17.15. Nothing in this Lease shall be construed to render or constitute Landlord in any way or for any purpose a partner, joint venturer or associate in any relationship with Tenant other than that as Landlord and Tenant, nor shall this Lease be construed to authorize either party to act as agent for the other party except as expressly provided to the contrary in this Lease. Section 17.16. Throughout the Lease Term, Tenant shall deliver to Landlord within thirty (30) days following the end of each month accurate copies of financial statements, including balance sheet and profit/loss statement for said month and on a year to date basis, reflecting the financial condition of Tenant and of the Hospital, and within one hundred twenty (120) days following the end of Tenant's fiscal year, accurate copies of the annual financial statements for Tenant and the Hospital. Section 18. Landlord Inspection. Without limiting any other rights reserved or available to Landlord under this Lease, in law or in equity, Landlord on behalf of itself and its agents reserves the following rights to be exercised at Landlord's election: (a) To inspect the Premises after reasonable notice and to make repairs, additions or alterations to the Premises, or any part thereof, as permitted or required under this Lease, whether such repairs are the responsibility of Landlord or Tenant; and (b) To enter upon the Premises for any and all of said purposes and may exercise any and all of the foregoing rights hereby reserved during normal business hours unless an emergency exists, in which case Landlord shall have the right of entry upon 24 hours advance notice. Section 19. Estoppel Statements. The parties hereto shall, at any time and from time to time upon not less than ten (10) days prior written notice from the other party, execute, acknowledge and deliver to such other party, in form reasonably satisfactory to such other party -38- 38 or such other party's mortgagee, in the case of a request by Tenant, a written statement certifying (if true) that this Lease is unmodified and in full force and effect (or if there have been modifications stating the nature thereof), that such other party is not in default hereunder (or specifying the nature of any default), the date to which rental and other charges have been paid and such other information as may be reasonably required by such other party. It is intended that any such statement delivered pursuant to this subsection may be relied upon by any prospective purchaser of the Premises and their respective successors and assigns. Section 20. Hazardous Substances. Tenant shall not generate, dispose of, release, use, handle, possess or store any Hazardous Substances upon the Premises except in accordance with applicable environmental laws. Tenant shall, at its sole cost and expense, promptly remove or clean up any Hazardous Substances introduced onto the Premises by Tenant or with its permission or at its sufferance. Such removal or cleanup shall be in compliance with all applicable environmental laws. Tenant hereby agrees to indemnify and hold Landlord harmless and agrees to defend Landlord from all losses, damages, claims and liabilities and fines, including costs and reasonable attorneys' fees, of any nature whatsoever in connection with the actual or alleged presence upon the Premises of any Hazardous Substance introduced by Tenant or with its permission or at its sufferance. Section 21. Subordination. Tenant acknowledges and agrees that this Lease is and shall be subordinate to any liens created in connection with the incurrence of the Loan. Tenant further agrees to execute any and all documents which may be reasonably requested by Landlord's lender to evidence said subordination provided the same include a provision wherein the lender agrees not to disturb Tenant's possession of the Premises upon the occurrence of a default under the Loan unless Tenant is then in default of its obligations hereunder. IN WITNESS WHEREOF, the parties hereby execute this Lease Agreement on the day and year first written above. LANDLORD: PARKVIEW REGIONAL HOSPITAL, INC. By: /s/ Randolph Z. Katz ----------------------------------- Its: Chairman of Board of Trustees ---------------------------------- TENANT: BRIM HOSPITALS, INC. By: /s/ John L. Miller ---------------------------------- Its: President ---------------------------------- -39- 39 STATE OF TX ) ) ss. COUNTY OF LIMESTONE) BEFORE ME, the undersigned authority, on this day personally appeared Randy Kott, the Chairman of Parkview Regional Hospital, Inc., to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, and as the act and deed of said Authority, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 24th day of April, 1996. LINDA A. SMERGLIA /s/ Linda Smerglia MY COMMISSION EXPIRES ----------------------------- May 30, 1999 Notary Public STATE OF Oregon ) ) ss. COUNTY OF Multnomah) BEFORE ME, the undersigned authority, on this day personally appeared John R. Miller, the President of Brim Hospitals, Inc., an Oregon corporation, known to me to be the person and officer whose name is subscribed to the foregoing instrument, and acknowledged to me that he executed the same for the purposes and consideration therein expressed, and as the act and deed of said corporation, and in the capacity therein stated. GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 1st day of May, 1996. OFFICIAL SEAL /s/ Linda J. Bryant LINDA J. BRYANT ---------------------------- NOTARY PUBLIC-OREGON Notary Public COMMISSION NO. 040767 MY COMMISSION EXPIRES JAN. 17, 1999 -40- 40 FIRST AMENDMENT TO LEASE AGREEMENT AND TO AMENDED MEMORANDUM OF LEASE THE FIRST AMENDMENT TO LEASE AGREEMENT AND TO AMENDED MEMORANDUM OF LEASE is made and entered into effective as of the 3rd day of June, 1997 by and between Parkview Regional Hospital, Inc., a Texas non-profit corporation ("Landlord"), and Brim Hospitals, Inc., an Oregon corporation ("Tenant"). RECITALS A. By Lease Agreement dated effective as of April 24, 1996 (the "Lease"), Landlord leased to Tenant and Tenant leased from Landlord the acute care facility commonly known as Parkview Regional Hospital, 312 East Glendale Street, Mexia, Texas, (the "Hospital"). The Lease contemplated that the property leased to Tenant included the Real Property (as defined in the Lease, which Real Property is described in Exhibit A hereto (the "Original Real Property"). B. A Memorandum with respect to the Lease was placed of record by Memorandum of Lease dated April 24, 1996 and recorded in Volume 948, Page 543 of the Real Estate Records of Limestone County, Texas, which Memorandum was amended by Amended Memorandum of Lease dated May 15, 1996 and recorded in Volume 951, Page 512 of the Real Estate Records of Limestone County, Texas (the "Memorandum"). C. Landlord is interested in entering into a transaction (the "Exchange Transaction") pursuant to which it would exchange a portion of the Original Real Property which is described in Exhibit B hereto (the "Old Parcel") with a third party and would obtain in consideration therefor a new parcel of land which is described in Exhibit C hereto (the "New Parcel"), subject to the reservation by such third party of an easement over the New Parcel, which easement is described in Exhibit D hereto (the "Easement"), which would be deemed for all purposes of the Lease to be included in the Real Property (as that term is defined in the Lease). D. In light of the proposed Exchange Transaction, Landlord has requested, and Tenant has agreed, that Tenant consent to an amendment of the Lease to reflect the affect of the Exchange Transaction on the Lease and the Landlord's and the Tenant's rights and obligations thereunder. E. The Lease provides that it may only be amended by written instrument signed by Landlord and Tenant. F. Landlord and Tenant are interested in documenting the terms and conditions of such amendment and of amending the Memorandum by placing this document of record. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: 1 41 AGREEMENT 1. Replacement of Exhibit A. Exhibit A to the Lease is hereby deleted in its entirety and Exhibit E attached hereto is hereby substituted in lieu thereof. Landlord and Tenant acknowledge and agree that the conveyance of the New Parcel and rights of Tenant with respect thereto under the terms of the Lease are subject to the rights reserved by the former owner thereof under the Easement. 2. Amendment of Part II, Section 4.2. The first sentence of Part II, Section 4.2 is hereby deleted in its entirety and the following inserted instead: After the Commencement Date, Tenant shall neither use nor permit to be used the Premises, or any part thereof for any purpose or purposes other than as an acute care facility without the prior written consent of Landlord, which shall not be unreasonably withheld; provided, however, that Tenant shall have the right to operate a medical office building on the New Parcel it being understood and agreed as of the date hereof that Landlord and Tenant shall, as and when they deem appropriate, pursue the development on the New Parcel by either Landlord or Tenant of a medical office building which, upon completion of the construction thereof, is anticipated to be operated by Tenant under the terms of either this Lease or an amendment hereto if and to the extent such an amendment is deemed to be necessary and appropriate by Landlord and Tenant. 3. Hospital Mortgage. Tenant acknowledges and agrees that the Premises (as defined in the Lease) are subject to a first lien in favor of Key Bank ("Lender"). Tenant further acknowledges and agrees that the effectiveness of this Amendment is specifically conditioned on Landlord securing the Agreement of Lender to release the Old Parcel from such lien and that in connection therewith Tenant may be required to execute certain documents to confirm the subordination of its leasehold rights to the lien granted to Lender. By its signature set forth below, Tenant agrees to execute any and all documents as may be reasonably requested by Lender to evidence the continued subordination of its leasehold interest in the Premises provided Lender confirms in such documents its non-disturbance obligations in favor of Tenant. 4. Counterparts. This Amendment may be executed in counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute but one and the same instrument. 5. No Further Modification. Except as specifically set forth herein, the Lease shall remain in full force and effect as originally executed by Landlord and Tenant. 2 42 IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth above. LANDLORD: PARKVIEW REGIONAL HOSPITAL, INC. By: /s/ Randolph T. Kott ------------------------------------------ Its: Chairman ------------------------------------------ TENANT: BRIM HOSPITALS, INC. By: /s/ Taylor ------------------------------------------- Its: Vice President ------------------------------------------- 3 43 ACKNOWLEDGMENTS STATE OF TEXAS ) ) ss. COUNTY OF LIMESTONE ) On this 10 day of June, 1997, before me, a Notary Public in and for the State of Texas, personally appeared Randolph L. Kott, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed this instrument, on oath stated that he was authorized to execute the instrument as the Chairman of Parkview Regional Hospitals, Inc., a Texas non-profit corporation, and acknowledged it to be the free and voluntary act and deed of said corporation for the uses and purposes mentioned in the instrument. IN WITNESS WHEREOF, I have hereunto set my hand and official seal the day and year first above written. /s/ Martha Clark Lynch ---------------------------------- Notary Public in and for the State of Texas Residing at: Mexia, TX ---------------------- My commission expires: 01-29-98 ------------ STATE OF OREGON ) ) ss. COUNTY OF MULTNOMAH ) On this 3rd day of June, 1997, before me, a Notary Public in and for the State of Oregon, personally appeared Steve Taylor personally known to me (or proved to me on the basis of satisfactory evidence) to be the person who executed this instrument, on oath stated that he was authorized to execute the instrument as the Vice President of Brim Healthcare, Inc., an Oregon corporation, and acknowledged it to be the free and voluntary act and deed of said corporation for the uses and purposes mentioned in the instrument. IN WITNESS WHEREOF, I have hereunto set my hand and official seal the day and year first above written. /s/ Linda J. Bryant ---------------------------------- Notary Public in and for the State of Oregon Residing at: Gresham, OR ---------------------- My commission expires: 1-17-99 ------------ [SEAL] OFFICIAL SEAL LINDA J. BRYANT NOTARY PUBLIC-OREGON COMMISSION NO. 040767 MY COMMISSION EXPIRES JAN. 17, 1999 4 44 EXHIBIT A THE ORIGINAL REAL PROPERTY 5 45 February 18, 1996 Surveyor's Field Note to PARKVIEW REGIONAL HOSPITAL for ACRES, being a part of SUBDIVISION 8 and SUBDIVISION 9 of DIVISION "L" of the City of Mexia, Limestone County, Texas, according to the plat of record in Volume 2, Page 17 of the Plat Records of Limestone County and embracing those certain tracts described as the SECOND TRACT, THIRD TRACT, FOURTH TRACT and FIFTH TRACT in a deed to PARKVIEW REGIONAL HOSPITAL, INC. of record in Volume 865 Page 195 of the Deed Records of Limestone County, Texas, also embracing that certain tract described in a deed to PARKVIEW REGIONAL HOSPITAL, of record in Volume 640, Page 183 of the Deed Records of Limestone County, Texas said 3.339 acre tract being more particularly described by these metes and bounds as follows: BEGINNING at a 1/2" iron rod found in the intersection of the south margin of GLENDALE AVENUE, with the west margin of BONHAM STREET, said streets shown on the recorded plat of said DIVISION "L", being the northeast corner of said SUBDIVISION 8, same being the northeast corner of said SECOND TRACT and being the northeast corner of this tract. THENCE in a southerly direction, with the west margin of said BONHAM STREET, same being the east line of said SECOND TRACT also along the east line of said FOURTH TRACT, also along the east line of said HOSPITAL tract described in Volume 940, Page 183 (record call of S 04 deg 40 min E. 110.00 feet) SOUTH 04 deg 40 min 41 sec EAST, at a distance of 380.09 feet pass a 1/2" iron rod found being the southeast corner of said FOURTH TRACT, same being the northeast corner of said HOSPITAL tract and continuing in all a distance of 489.89 feet to a 1/2" iron rod found being the eastern most southeast corner of said HOSPITAL tract, same being the northeast corner of that certain tract described in a deed to DONALD CORBITT and wife, DE LOU CORBITT, of record in Volume 938, Page 327 of the Deed Records of Limestone County, Texas and being the eastern most southeast corner of this tract. THENCE in a westerly direction, with a southeast line of said HOSPITAL tract (record call of S 85 deg 20 min W. 100.00 feet) same being the north line of said CORBITT tract (record call of S 85 deg 20 min 00 sec W. 100.00 feet) SOUTH 85 deg 16 min 40 sec WEST, a distance of 99.94 feet to a 1/2" iron rod found being the northwest corner of said CORBITT tract same being an interior corner of said HOSPITAL tract and being an interior corner of this tract. THENCE in a southerly direction, with the west line of said CORBITT tract (record call of S 04 deg 40 min 00 sec E. 100.00 feet) same being a line of said HOSPITAL tract (record call of S 04 deg 40 min E. 100.00 feet) SOUTH 04 deg 40 min 00 sec EAST, a distance of 99.99 feet to a 60 penny nail found in the north margin of TYLER STREET, said street shown on the recorded plat of said DIVISION "L", being the corner of said CORBITT tract, same being the southern most southeast corner of said HOSPITAL tract and being the southern most southeast corner of this tract. THENCE in a westerly direction, with the north margin of said TYLER STREET, same being south line of said HOSPITAL tract (record call of S 85 deg 20 min W. 140.00 feet) SOUTH 85 deg 27 min 01 sec WEST, a distance of 138.83 feet to a 1/2" iron rod found being the southwest corner of said HOSPITAL TRACT, same being the southeast corner of that certain tract called TRACT 1, in a deed to JAMES A. GRAFF and wife, JUNE E. GRAFF of record in Volume 717, Page 311 of the Deed Records of Limestone County, Texas and being the southern most southwest corner of this tract. THENCE in a northerly direction, with the east line of said TRACT 1, same being the west line of said HOSPITAL tract (record calls of N 04 deg 40 min W. 48.00 feet, N 85 deg 20 min E. 5.00 feet and N 04 deg 40 min W. 150.00 feet) also along the east line of TRACT 2, as described in said GRAFF deed (record call of N 04 deg 40 min E. 61 35 feet) for the following THREE (3) courses and distances: 1). NORTH 04 deg 42 min 37 sec WEST, a distance of 48.00 feet to a 1/2" iron rod set. 2). NORTH 85 deg 21 min 26 sec EAST, a distance of 4.50 feet to a 1/2" iron rod set and 3). NORTH 04 deg 28 min 47 sec WEST, at a distance of 66.52 feet pass a 1/2" iron rod found and continuing in all a distance of 161.72 feet to a 1/2" iron rod found and continuing in all a distance of 161.72 feet to a 1/2" iron rod found being the southeast corner of said FIFTH TRACT, same being the southwest corner of said FOURTH TRACT also being the northeast corner of said TRACT 2 and being an interior corner of this tract. THENCE in a westerly direction, with the south line of said FIFTH TRACT, same being the north line of said TRACT 2 (record call of S 85 deg 20 min W. 55.0 feet) SOUTH 85 deg 45 min 41 sec WEST, a distance of 58.74 feet to a 3/8" iron rod found being the southwest corner of said FIFTH TRACT, same being the northwest corner of said TRACT 2, also being the northeast corner of that certain tract described as the SECOND TRACT, in a deed to JOHN SIMS STUBBS, SR. and wife, EVONNE C. STUBBS, of record in Volume 784 Page 185 of the Deed Records of Limestone County, Texas same being the southeast corner of the FIRST TRACT in said STUBBS deed and being the western most southwest corner of this tract. THENCE in northerly direction, with the east line of said STUBBS SECOND TRACT same being the west line of said FIFTH TRACT (record call of northerly 1007 NORTH 04 deg 29 min 36 sec WEST, a distance of 99.25 feet to a 50 penny nail found in the south line of a tract occupied by BLAIR STUBBS FUNERAL HOME (No deed was found by this surveyor), being the northwest corner of said FIFTH TRACT, and being an interior corner of this tract. THENCE in an easterly direction, with the south line of said FUNERAL HOME tract, same being the north line of said FIFTH TRACT (record call of easterly 55 feet) NORTH 85 deg 19 min 31 sec EAST, a distance of 14.88 feet to an "X" found in concrete, being the southwest corner of said THIRD TRACT, same being the southeast corner of said FUNERAL HOME tract and being an interior corner of this tract. THENCE in a northerly direction, with the east line of said FUNERAL HOME tract, same being the west line of said THIRD TRACT (record call of northerly 280 feet) NORTH 04 deg 42 min 04 sec WEST, a distance of 280.16 feet to a 1/2" iron rod found in the south margin of said GLENDALE AVENUE, being the northeast corner of said FUNERAL HOME tract, same being the northwest corner of said THIRD TRACT, and being the northwest corner of this tract. THENCE in an easterly direction, with the south margin of said GLENDALE AVENUE, same being the north line of said THIRD TRACT, also along the north line of said SECOND TRACT NORTH 95 deg 18 min 14 sec EAST, a distance of 275.02 feet to the Point of Beginning, Continuing ACRES (145,440 Sq. Ft.) OF LAND. February 18, 1996 Surveyor's Field Note to PARKVIEW REGIONAL HOSPITAL for 0.687 ACRE, being a part of SUBDIVISION 5, of DIVISION "L", of the City of Mexia, Limestone County, Texas, according to the plat of record in Volume 2, Page 17 of the Plat Records of Limestone County and embracing that certain tract described as the FIRST TRACT in a deed to PARKVIEW REGIONAL HOSPITAL INC. of record in Volume 865, Page 195 of the Deed Records of Limestone County, Texas also embracing that certain called 40' x 115' tract described in a Special Warranty Deed from the CITY OF MEXIA to PARKVIEW REGIONAL HOSPITAL, Dated October 18, 1995, said 0.687 acre tract being more particularly described by these metes and bounds as follows: BEGINNING at a 1/2" iron rod found at the intersection of the west margin of BONHAM STREET, with the north margin of GLENDALE AVENUE, said streets shown on the recorded plat of said DIVISION "L", being the southeast corner of said SUBDIVISION 5, same being the southeast corner of said FIRST TRACT and being the southeast corner of this tract. THENCE in a westerly direction, with the north margin of said GLENDALE AVENUE, same being the south line of said SUBDIVISION 5, also being the south line of said FIRST TRACT (record call of S 85 deg W. 115 feet) SOUTH 85 deg 18 min 14 sec WEST, a distance of 115.01 feet to a 1/2" iron rod found being the southwest corner of said FIRST TRACT, same being the southeast corner of the CALVARY BAPTIST CHURCH (No deed was found by this surveyor) tract and being the southwest corner of this tract. THENCE in a northerly direction, with the east line of said CHURCH tract, same being the west line of said FIRST TRACT (record call of N 05 deg W. 220 feet) NORTH 04 deg 41 min 22 sec WEST, a distance of 220.04 feet to a 1/2" iron rod found in the south margin EVERGREEN STREET, said street shown on the recorded plat of said DIVISION "L", being the southwest corner of said 40' x 115' tract, same being the southeast corner of that certain called 18,600 Sq. Ft. tract described in a deed to CECIL ASHER, GAINOR LINDSEY and EDDIE NEW, TRUSTEES of record in Volume 821, Page 602 of the Deed Records of Limestone County, Texas and being an angle point in the west line of this tract. THENCE continuing in a northerly direction, over and across said EVERGREEN STREET, with the east line of said 18,600 Sq. Ft. tract (record call of N 04 deg 40 min W. 40.0 feet) same being the west line of said 40' x 115' tract (record call of N 114 deg 40 min W. 40.00 feet) NORTH 04 deg 37 min 19 sec WEST, a distance of 39.97 feet to a 1/2" iron rod found being the northeast corner of said 18,600 Sq. Ft. tract same being the northwest corner of said 40' x 115' tract and being the northwest corner of this tract. THENCE in an easterly direction, continuing across said EVERGREEN STREET, with the north line of said 40' x 115' tract (record call of N 85 deg 20 min E. 115.00 feet) NORTH 85 deg 16 min 35 sec EAST, a distance of 115.00 feet to a 1/2" iron rod found in the west margin of said BONHAM STREET, being the northeast corner of said 40' x 115' tract and being the northeast corner of this tract. THENCE in a southerly direction, with the west margin of said BONHAM STREET, same being the east line of said 40' x 115' tract (record call of S 04 deg 40 min E. 40.00 feet) SOUTH 04 deg 39 min 38 sec EAST, a distance of 40.05 feet to a 1/2" iron rod found being the southeast corner of said 40' x 115' tract, same being the northeast corner of said FIRST TRACT and being an angle point in the east line of this tract. THENCE continuing in a southerly direction and continuing with the west margin of said BONHAM STREET, being the east line of said FIRST TRACT (record call of S 05 deg E. 220 feet) SOUTH 04 deg 41 min 08 sec EAST, a distance of 220.02 feet to the Point of Beginning, Containing 0.687 ACRE (29.908 Sq. Ft) OF LAND. 46 0.262 ACRE, being as of LOT 4, in SUBDIVISION "L", and the called south FORTY-NINE feet of LOT 3, in said SUBDIVISION 1 of the City of Mexia, Limestone County, Texas, according to the plat of record in Volume 2, Page 17 of the Plat Records of Limestone County and embracing that certain tract described in a deed to PARKVIEW REGIONAL HOSPITAL, INC., of record in Volume 937, Page 192 of the Deed Records of Limestone County, Texas said 0.262 acre tract being more particularly described by these metes and bounds as follows: BEGINNING at a 1/2" iron rod set in the east margin of McKINNEY STREET, said street shown on the recorded plant of said DIVISION "L", being the northwest corner of this tract same being the northwest corner of said PARKVIEW tract, also being the southwest corner of that certain tract described as the SECOND TRACT, in a deed to MURVIN STERLING of record in Volume 800, Page 612 of the Deed of Records of Limestone County, Texas, from which a 1" metal pipe found being the northwest corner of the FIRST TRACT as described in said STERLING deed, bears: NORTH 04 deg 37 min 43 sec WEST, a distance of 141.13 feet. THENCE in an easterly direction, with the north line of said PARKVIEW tract, same being the south line of said SECOND TRACT (record call of 115 feet) NORTH 85 deg 22 min 17 sec EAST, a distance of 14.94 feet to a 1/2" iron rod set in the east line of said LOT 3, same being the west line of LOT 6, in said SUBDIVISION 1, being a corner of said SECOND tract, same being the northeast corner of said PARKVIEW tract and being the northeast corner of this tract. THENCE in a southerly direction, with the east line of said LOT 3, (record call of 50 feet) same being the west line of said LOT 6 (record call of 150 feet) also along the east line of said LOT 4 (record call of 50 feet) SOUTH 04 deg 38 min 49 sec EAST, a distance of 99.09 feet to a 1/2" iron rod found being the southeast corner of said PARKVIEW tract and said LOT 3, same being the northeast corner of LOT 5, in said SUBDIVISION 1, being the southeast corner of this tract, from which a 1/2" iron rod found being the southeast corner of said LOT 5, bears: SOUTH 04 deg 39 min 39 sec EAST, a distance of 49.93 feet. THENCE in a westerly direction, with the common line between said LOT 4 and 5 (record call of 115 feet) SOUTH 85 deg 22 min 17 sec WEST, a distance of 114.98 feet to a 1/2" iron rod set in the east margin of said McKINNEY STREET, being the southwest corner of said LOT 4, same being the northwest corner of said LOT 5, being the southwest corner of this tract, from which a 1/2" iron rod set being the southwest corner of said SUBDIVISION 1, bears: SOUTH 04 deg 37 min 43 sec EAST, a distance of 49.93 feet. THENCE in a northerly direction, with the east margin of said McKINNEY STREET, same being the west line of said LOT 4 (record call of 50 feet) also along the west line of said LOT 3 (record call of 50 feet) NORTH 04 deg 37 min 43 sec WEST, a distance of 99.09 feet to the Point of Beginning. Containing 0.262 ACRE (11,382 Sq. Ft.) OF LAND. Surveyed February 12 & 13, 1996 47 EXHIBIT B THE OLD PARCEL 6 48 0.262 Acre, being all of Lot 4, in Subdivision 1, of Division "L", and the called South forty-nine feet of Lot 3, in said Subdivision 1, of the City of Mexia, Limestone County, Texas, according to the plat of record in Volume 2, Page 17 of the Plat Records of Limestone County and embracing that certain tract described in a Deed to Parkview Regional Hospital, Inc. of record in Volume 937, Page 192 of the Deed Records of Limestone County, Texas, said 0.262 acre tract being more particularly described by these metes and bounds as follows: BEGINNING at a 1/2 inch iron rod set in the East margin of McKinney Street, said street shown on the recorded plat of said Division "L", being the Northwest corner of this tract, same being the Northwest corner of said Parkview tract, also being the Southwest corner of that certain tract described as the Second Tract, in a Deed to Murvin Sterling, of record in Volume 800, Page 612 of the Deed Records of Limestone County, Texas, from which a 1 inch metal pipe found being the Northwest corner of the First Tract as described in said Sterling Deed, bears: North 04 deg. 37 min. 43 sec. West, a distance of 141.13 feet; THENCE in an Easterly direction, with the North line of said Parkview tract, same being the South line of said Second Tract (record call of 115 feet) North 85 deg. 22 min. 17 sec. East, a distance of 114.94 feet to a 1/2 inch iron rod set in the East line of said Lot 3, same being the West line of Lot 6, in said Subdivision 1, being a corner of said Second Tract, same being the Northeast corner of said Parkview tract and being the Northeast corner of this tract; THENCE in a Southerly direction, with the East line of said Lot 3, (record call of 50 feet) same being the West line of said Lot 6 (record call of 150 feet) also along the East line of said Lot 4 (record call of 50 feet) South 04 deg. 38 min. 49 sec. East, a distance of 99.09 feet to a 1/2 inch iron rod found being the Southeast corner of said Parkview tract and said Lot 3, same being the Northeast corner of Lot 5, in said Subdivision 1, being the Southeast corner of this tract, from which a 1/2 inch iron rod found being the Southeast corner of said Lot 5, bears South 04 deg. 39 min. 39 sec. East, a distance of 49.93 feet; THENCE in a Westerly direction, with the common line between said Lots 4 and 5 (record call of 115 feet) South 85 deg. 22 min. 17 sec. West, a distance of 114.98 feet to a 1/2 inch iron rod set in the East margin of said McKinney Street, being the Southwest corner of said Lot 4, same being the Northwest corner of said Lot 5, being the Southwest corner of this tract, from which a 1/2 inch iron rod set being the Southwest corner of said Subdivision 1, bears: South 04 deg. 37 min. 43 sec. East, a distance of 49.93 feet; THENCE in a Northerly direction, with the East line of said McKinney Street, same being the West line of said Lot 4 (record call of 50 feet) also being the West line of said Lot 3 (record call of 50 feet) North 04 deg. 37 min. 43 sec. West, a distance of 99.09 feet to the POINT OF BEGINNING, containing 0.262 Acre (11,392 sq. ft.) of land. EXHIBIT A ---- 49 EXHIBIT C THE NEW PARCEL 7 50 Description of: 1.069 Acres, Part of Subdivisions 5 & 6, Division L, and a part of Evergreen St. (closed), City of Mexia, Limestone Co., Texas, Owner: Calvary Baptist Church, Vol. 442, Pg. 138, L.C.D.R. BEING a 1.069 acres tract of land situated in Division L, City of Mexia, Limestone County, Texas, a part of Subdivisons 5 & 6, and a part of Evergreen St. (closed) in said Division, said subdivisions being conveyed from the Mexia Independent School District to Calvary Baptist Church by deed dated May 17, 1957 and recorded in Vol. 442, Pg. 138, Deed Records of Limestone County, Texas (L.C.D.R.), and said part (40.0 ft. by 465 ft.) of Evergreen St. being conveyed from the City of Mexia to Calvary Baptist Church by deed dated September 29, 1989 and recorded in Vol. 821, Pg. 602, L.C.D.R., said 1.069 acres being more particularly described by metes and bounds as follows: BEGINNING at a found 1/2" iron rod in the center of Evergreen St. and in the North line of said part of said street conveyed to Calvary Baptist Church for Northeast corner of this tract, same being the Northwest corner of that tract, conveyed from Harris Methodist Hospital to Parkview Regional Hospital by deed of record in Vol. 865, Pg. 195, L.C.D.R. THENCE S.4 degrees 40'E. with the West line of said hospital tract, at 40.0 ft. a found 1/2" iron rod in the South line of Evergreen St. (closed), in all, 260.00 ft. to a found 1/2" iron rod in the North line of Glendale St. and in the South line of Subdivision 5 for Southeast corner of this tract, same being the Southwest corner of said Hospital tract; THENCE S.85 degrees 20'W. with the North line of Glendale St. and the South line of Division L, at 175.0 ft. the Southwest corner of Subdivision 5 and the Southeast corner of Subdivision 6, in all, 179.54 ft. to a set 1/2" iron rod in the South line of Subdivision 6 for Southwest corner of this tract; THENCE N.4 degrees 28'W. at 220.01 ft. the South line of Evergreen St. (closed), in all, 260.01 ft. to a set 1/2" iron rod in the center of Evergreen St. (closed), same being the North line of that part of Evergreen St. conveyed to Calvary Baptist Church, for Northeast corner of this tract; THENCE N.85 degrees 20'E. at 3.62 ft. the intersection of the extended boundary line between Subdivisions 5 & 6, in all, 178.62 ft. with the centerline of Evergreen St. (closed) to the point of BEGINNING, containing 1.069 acres. The foregoing description was prepared from that plat dated May 20, 1997 that correctly represents that actual ground survey made under my supervision. Dated this 20th day of May, 1997 /s/ Joe L. Haney - ------------------------------------- Joe L. Haney, P.E., R.P.L.S. No. 3282 Haney Engineering and Surveying P.O. Box 307 408 N. Kaufman St., Mexia, Texas 76667 817-562-6954 EXHIBIT A PG ----- ----- 51 EXHIBIT D THE EASEMENT 8 52 Description of: A Three (3) Ft. Easement, Part of Subdivision 6, Division L, City of Mexia, Limestone County, Texas, and Part of Evergreen St. (closed). Owner: Calvary Baptist Church, Vol. 442, Pg. 138, and Vol. 821, Pg. 602, L.C.D.R. BEING a three (3) ft. wide easement a part of Subdivision 6, Division L. and a part of Evergreen St. (closed), City of Mexia, Limestone County, Texas, said subdivision being conveyed from Mexia Independent School District to Calvary Baptist Church by deed dated May 17, 1957 and recorded in Vol. 442, Pg. 138, Deed Records of Limestone County, Texas (L.C.D.R.) and said part of Evergreen St. (closed) being from the City of Mexia to Calvary Baptist church by deed dated September 29, 1989 and recorded in Vol. 821, Pg. 602, L.C.D.R., said easement being part of and adjacent to the Western edge of a 1.069 acres tract surveyed this date out of Subdivision 5, Division L and said Subdivision 6, and out of said part of Evergreen St. (closed), said easement being more particularly described by metes and bounds as follows: BEGINNING at a set 1/2" iron rod in the North line of Glendale St. and in the South line of Subdivision 6 for Southwest corner of this easement, same being the Southwest corner of said 1.069 acres tract, said corner bears S.85 degrees 20'W. 4.54 ft. from the Southeast corner of Subdivision 6 and N.85 degrees 20'E. 285.46 ft. from the Southwest corner of Subdivision 6; THENCE N.4 degrees 28'W. with the West line of said 1.069 acres tract, at 220.01 ft. the South line of Evergreen St. (closed), in all, 260.01 ft. to a set 1/2" iron rod for Northwest corner of this easement and said 1.069 acres tract, said corner being in the center of Evergreen St. (closed); THENCE N.85 degrees 20'E. 3.0 ft. with the centerline of Evergreen St. (closed) and the North line of said 1.069 acres tract to a point for Northeast corner of this easement; THENCE S.4 degrees 28'E., at 40.00 ft., the South line of Evergreen St. (closed), in all, 260.01 ft. to a point in the North line of Glendale St. and in the South line of Subdivision 6 and said 1.069 acres tract for Southeast corner of this easement; THENCE S.85 degrees 20'W. 3.0 ft. with the North line of Glendale St. and the South line of Subdivision 6 and said 1.069 acres tract, to the point of BEGINNING. The foregoing description was prepared from that plat dated May 20, 1997 that correctly represents that actual ground survey made under my supervision. Dated this 23rd day of May, 1997. /s/ JOE L. HANEY - ----------------------------------------------- Joe L. Haney, P.E., R.P.L.S. No. 3282 Haney Engineering and Surveying P.O. Box 307 408 N. Kaufman St., Mexia, Texas 76667 817-562-6954 [SEAL] 53 EXHIBIT E NEW LEGAL DESCRIPTION 9 54 February 18, 1996 Surveyor a Field Note to PARKVIEW REGIONAL HOSPITAL for: .39 ACRES being a part of SUBDIVISION 8 of DIVISION "L" of the City of Mexie, Limestone County, Texas, according to the plat of record in Volume 2, Page 17 of the Plat Records of Limestone County and embracing those certain tracts described as the SECOND TRACT, THIRD TRACT, FOURTH TRACT and FIFTH TRACT in a deed to PARKVIEW REGIONAL HOSPITAL INC. of record in Volume 865 Page 195 of the Deed Records of Limestone County, Texas, also embracing that certain tract described in a deed to PARKVIEW REGIONAL HOSPITAL of record in Volume 640, Page 183 of the Deed Records of Limestone County, Texas, and 3.339 acre tract being more particularly described by these metes and bounds as follows: BEGINNING at a 1/2" iron rod found in the intersection of the south margin of GLENDALE AVENUE, with the west margin of BONHAM STREET, said streets shown on the recorded plat of said DIVISION "L", being the northeast corner of said SUBDIVISION 8, same being the northeast corner of said SECOND TRACT and being the northeast corner of this tract. THENCE in a southerly direction, with the west margin of said BONHAM STREET, same being the east line of said SECOND TRACT also along the east line of said FOURTH TRACT, also along the east line of said HOSPITAL tract described in Volume 940, Page 183 (record call of S 04 deg 40 MIN. E. 110.00 feet) SOUTH 04 deg 40 min. 41 sec. EAST, at a distance of 380.09 feet pass a 1/2" iron rod found being the southeast corner of said FOURTH TRACT, same being the northeast corner of said HOSPITAL tract and continuing in all a distance of 499.89 feet to a 1/2" iron rod found being the eastern most southeast corner of said HOSPITAL tract, same being the northeast corner of that certain tract described in a deed to DONALD CORBITT and wife, DE LOU CORBITT, of record in Volume 938, Page 327 of the Deed Records of Limestone County, Texas and being the eastern most southeast corner of this tract. THENCE in a westerly direction, with a southeast line of said HOSPITAL tract (record call of S 85 deg 20 min. W., 100.00 feet) same being the north line of said CORBITT tract (record call of S 85 deg 20 min. 00 sec. W. 100.00 feet) SOUTH 85 deg 16 min. 40 sec. WEST, a distance of 99.94 feet to a 1/2" iron rod found being the northwest corner of said CORBITT tract, same being an interior corner of said HOSPITAL tract and being an interior corner of this tract. THENCE in a southerly direction, with the west line of said CORBITT tract (record call of S 04 deg 40 min 00 sec. E. 100.00 feet) same being a line of said HOSPITAL tract (record call of S 04 deg 40 min. E. 100.00 feet) SOUTH 04 deg 40 min. 00 sec. EAST, a distance of 99.99 feet to a 60 penny Nail found in the north margin of TYLER STREET, said street shown on the recorded plat of said DIVISION "L", being the southwest corner of said CORBITT tract, same being the southern most southeast corner of said HOSPITAL tract and being the southern most southeast corner of this tract. THENCE in a westerly direction, with the north margin of said TYLER STREET, same being the south line of said HOSPITAL tract (record call of S 85 deg 20 min. W. 140.00 feet) SOUTH 85 deg 27 min. 01 sec. WEST, a distance of 138.83 feet to a 1/2" iron rod found being the southwest corner of said HOSPITAL tract, same being the southeast corner of that certain tract called TRACT 1, in a deed to JAMES A. GRAFF and wife, JUNE E. GRAFF of record in Volume 717, Page 311 of the Deed Records of Limestone County, Texas and being the southern most southwest corner of this tract. THENCE in a northerly direction, with the east line of said TRACT 1, same being the west line of said HOSPITAL tract (record calls of N 04 deg 40 min. W. 48.00 feet N 85 deg 20 min. E. 5.00 feet and N 04 deg 40 min W. 150.00 feet) also along the east line of TRACT 2, as described in said GRAFF deed (record call of N 04 deg 40 min E. 61 35 feet) for the following THREE (3) courses and distances: 1) NORTH 04 deg 42 min. 37 sec. WEST, a distance of 48.00 feet to a 1/2" iron rod set. 2) NORTH 85 deg 21 min 28 sec. EAST, a distance of 4.50 feet to a 1/2" iron rod set and 3) NORTH 04 deg 28 min. 47 sec. WEST, at a distance of 66.52 feet pass a 1/2" iron rod found and continuing in all a distance of 181.72 feet to a 1/2" iron rod found being the southeast corner of said FIFTH TRACT, same being the southwest corner of said FOURTH TRACT also being the northeast corner of said TRACT 2 and being an interior corner of this tract. THENCE in a westerly direction, with the south line of said FIFTH TRACT, same being the north line of said TRACT 2 (record call of S 85 deg 20 min. W. 55.0 feet) SOUTH 85 deg 45 min. 41 sec. WEST, a distance of 55.74 feet to a 3/5" iron rod found being the southwest corner of said FIFTH TRACT, same being the northwest corner of said TRACT 2, also being the northeast corner of that certain tract described as the SECOND TRACT, in a deed to JOHN SIMS STUBBS, SR. and wife, EVONNE C. STUBBS, of record in Volume 784 Page 185 of the Deed Records of Limestone County, Texas same being the southeast corner of the FIRST TRACT in said STUBBS deed and being the western most southwest corner of this tract. THENCE in northerly direction, with the east line of said STUBBS SECOND TRACT same being the west line of said FIFTH TRACT (record call of northerly 1007 NORTH 04 deg 29 min. 36 sec. WEST, a distance of 99.25 feet to a 50 penny Nail found in the south line of a tract occupied by BLAIR STUBBS FUNERAL HOME (No deed was found by this surveyor), being the northwest corner of said FIFTH TRACT, and being an interior corner of this tract. THENCE in an easterly direction, with the south line of said FUNERAL HOME tract, same being the north line of said FIFTH TRACT (record call of easterly 55 feet) NORTH 85 deg 19 min. 31 sec. EAST, a distance of 14.88 feet to an "X" found in concrete, being the southwest corner of said THIRD TRACT, same being the southeast corner of said FUNERAL HOME tract and being an interior corner of this tract. THENCE in a northerly direction, with the east line of said FUNERAL HOME tract, same being the west line of said THIRD TRACT (record call of northerly 280 feet) NORTH 04 deg 42 min. 04 sec. WEST, a distance of 280.16 feet to a 1/2" iron rod found in the south margin of said GLENDALE AVENUE, being the northeast corner of said FUNERAL HOME tract, same being the northwest corner of said THIRD TRACT, and being the northwest corner of this tract. THENCE in an easterly direction, with the south margin of said GLENDALE AVENUE, same being the north line of said THIRD TRACT, also along the north line of said SECOND TRACT NORTH 85 deg 18 min. 14 sec. EAST, a distance of 273.02 feet to the Point of Beginning, Continuing ACRES (145.440 Sq. Ft.) OF LAND. February 18, 1996 Surveyors Field Note to PARKVIEW REGIONAL HOSPITAL for: 0.887 ACRE, being a part of SUBDIVISION 5, of DIVISION "L", of the City of Mexia, Limestone County, Texas, according to the plat of record in Volume 2, Page 17 of the Plat Records of Limestone County and embracing that certain tract described as the FIRST TRACT in a deed to PARKVIEW REGIONAL HOSPITAL, INC. of record in Volume 865, Page 195 of the Deed Records of Limestone County, Texas also embracing that certain called 40' x 115' tract described in a Special Warranty Deed from the CITY OF MEXIA TO PARKVIEW REGIONAL HOSPITAL, Dated October 18, 1995, said 0.667 acre tract being more particularly described by these metes and bounds as follows: BEGINNING at a 1/2" iron rod found at the intersection of the west margin of BONHAM STREET, with the north margin of GLENDALE AVENUE, said streets shown on the recorded plan of said DIVISION "L", being the southeast corner of said SUBDIVISION 5, same being the southeast corner of said FIRST TRACT and being the southeast corner of this tract. THENCE in a westerly direction, with the north margin of said GLENDALE AVENUE, same being the south line of said SUBDIVISION 5, also being the south line of said FIRST TRACT (record call of S 85 deg W. 115 feet) SOUTH 85 deg 18 min. 14 sec. WEST, a distance of 115.01 feet to a 1/2" iron rod found being the southwest corner of said FIRST TRACT, same being the southeast corner of the CALVARY BAPTIST CHURCH (No deed was found by this surveyor) tract and being the southwest corner of this tract. THENCE in a northerly direction, with the east line of said CHURCH tract, same being the west line of said FIRST TRACT (record call of N 05 deg W. 220 feet) NORTH 04 deg 41 min. 22 sec. WEST, a distance of 220.04 feet to a 1/2" iron rod found in the south margin EVERGREEN STREET, said street shown on the recorded plat of said DIVISION "L", being the southwest corner of said 40' x 115' tract, same being the southeast corner of that certain called 18.600 Sq. Ft. tract described in a deed to CECIL ASHER, GAINOR LINDSEY and EDDIE NEW, TRUSTEES, of record in Volume 821, Page 602 of the Deed Records of Limestone County, Texas and being an angle point in the west line of this tract. THENCE continuing in a northerly direction, over and across and EVERGREEN STREET, with the east line of said 18.800 Sq. Ft. tract (record call of N 04 deg 40 min. W. 40.0 feet) same being the west line of said 40' x 115' tract (record call of N 14 deg 40 min. W. 40.00 feet) NORTH 04 deg 37 min. 19 sec. WEST, a distance of 39.97 feet to a 1/2" iron rod found being the northeast corner of said 18,600 Sq. Ft. tract, same being the northwest corner of said 40' x 115' tract and being the northwest corner of this tract. THENCE in an easterly direction continuing across said EVERGREEN STREET, with the north line of said 40' x 115' tract (record call of N 85 deg 20 min. E. 115.00 feet) NORTH 85 deg 15 min. 35 sec EAST, a distance of 115.00 feet to a 1/2' iron rod found in the west margin of said BONHAM STREET, being the northeast corner of said 40' x 115' tract and being the northeast corner of this tract. THENCE in a southerly direction, with the west margin of said BONHAM STREET, same being the east line of said 40' x 115' tract (record call of S 04 deg 40 min. E. 40.00 feet) SOUTH 04 deg 39 min. 38 sec EAST, a distance of 40.05 feet to a 1/2" iron rod found being the southeast corner of said 40' x 115' tract, same being the northeast corner of said FIRST TRACT and being an angle point in the east line of this tract. THENCE continuing in a southerly direction and continuing with the west margin of said BONHAM STREET, being the east line of said FIRST TRACT (record call of S 05 deg E. 220 feet) SOUTH 04 deg 41 min. 08 sec EAST, a distance of 220.02 feet to the Point of Beginning, Containing 0.687 ACRE (29.908 Sq. Ft.) OF LAND. 55 Description of: 1.069 Acres, Part of Subdivisions 5 & 6, Division L, and a part of Evergreen St. (closed), City of Mexia, Limestone Co., Texas, Owner: Calvary Baptist Church, Vol. 442, Pg. 138, L.C.D.R. BEING a 1.069 acres tract of land situated in Division L, City of Mexia, Limestone County, Texas, a part of Subdivisions 5 & 6, and a part of Evergreen St. (closed) in said Division, said subdivisions being conveyed from the Mexia Independent School District to Calvary Baptist Church by deed dated May 17, 1957 and recorded in Vol. 442, Pg. 138, Deed Records of Limestone County, Texas (L.C.D.R.), and said part (40.0 ft. by 465 ft.) of Evergreen St. being conveyed from the City of Mexia to Calvary Baptist Church by deed dated September 29, 1989 and recorded in Vol. 821, Pg. 602, L.C.D.R., said 1.069 acres being more particularly described by metes and bounds as follows: BEGINNING at a found 1/2" iron rod in the center of Evergreen St. and in the North line of said part of said street conveyed to Calvary Baptist Church for Northeast corner of this tract, same being the Northwest corner of that tract, conveyed from Harris Methodist Hospital to Parkview Regional Hospital by deed of record in Vol. 865, Pg. 195, L.C.D.R. THENCE S.4 degrees 40'E. with the West line of said hospital tract, at 40.0 ft. a found 1/2" iron rod in the South line of Evergreen St. (closed), in all, 260.00 ft. to a found 1/2" iron rod in the North line of Glendale St. and in the South line of Subdivision 5 for Southeast corner of this tract, same being the South-west corner of said Hospital tract; THENCE S.85 degrees 20'W. with the North line of Glendale St. and the South line of Division L, at 175.0 ft. the Southwest corner of Subdivision 5 and the South-east corner of Subdivision 6, in all, 179.54 ft. to a set 1/2" iron rod in the South line of Subdivision 6 for Southwest corner of this tract; THENCE N.4 degrees 28'W. at 220.01 ft. the South line of Evergreen St. (closed), in all, 260.01 ft. to a set 1/2" iron rod in the center of Evergreen St. (closed), same being the North line of that part of Evergreen St. conveyed to Calvary Baptist Church, for Northeast corner of this tract; THENCE N.85 degrees 20'E. at 3.62 ft. the intersection of the extended boundary line between Subdivisions 5 & 6, in all, 178.62 ft. with the centerline of Evergreen St. (closed) to the point of BEGINNING, containing 1.069 acres. The foregoing description was prepared from that plat dated May 20, 1997 that correctly represents that actual ground survey made under my supervision. Dated this 20th day of May, 1997 /s/ JOE L. HANEY - -------------------------------------- Joe L. Haney, P.E., R.P.L.S. No. 3282 Haney Engineering and Surveying P.O. Box 307 408 N. Kaufman St., Mexia, Texas 76667 817-562-6954 56 Description of: A Three (3) Ft. Easement, Part of Subdivision 6, Division L, City of Mexia, Limestone County, Texas, and Part of Evergreen St. (closed). Owner: Calvary Baptist Church, Vol. 442, Pg. 138, and Vol. 821, Pg. 602, L.C.D.R. BEING a three (3) ft. wide easement a part of Subdivision 6, Division L. and a part of Evergreen St. (closed), City of Mexia, Limestone County, Texas, said subdivision being conveyed from Mexia Independent School District to Calvary Baptist Church by deed dated May 17, 1957 and recorded in Vol. 442, Pg. 138, Deed Records of Limestone County, Texas (L.C.D.R.) and said part of Evergreen St. (closed) being from the City of Mexia to Calvary Baptist church by deed dated September 29, 1989 and recorded in Vol. 821, Pg. 602, L.C.D.R., said easement being part of and adjacent to the Western edge of a 1.069 acres tract surveyed this date out of Subdivision 5, Division L and said Subdivision 6, and out of said part of Evergreen St. (closed), said easement being more particularly described by metes and bounds as follows: BEGINNING at a set 1/2" iron rod in the North line of Glendale St. and in the South line of Subdivision 6 for Southwest corner of this easement, same being the Southwest corner of said 1.069 acres tract, said corner bears S.85 degrees 20'W. 4.54 ft. from the Southeast corner of Subdivision 6 and N. 85 degrees 20'E. 285.46 ft. from the Southwest corner of Subdivision 6; THENCE N.4 degrees 28'W. with the West line of said 1.069 acres tract, at 220.01 ft. the South line of Evergreen St. (closed), in all, 260.01 ft. to a set 1/2" iron rod for Northwest corner of this easement and said 1.069 acres tract, said corner being in the center of Evergreen St. (closed); THENCE N.85 degrees 20'E. 3.0 ft. with the centerline of Evergreen St. (closed) and the North line of said 1.069 acres tract to a point for Northeast corner of this easement; THENCE S.4 degrees 28'E., at 40.00 ft., the South line of Evergreen St. (closed), in all, 260.01 ft. to a point in the North line of Glendale St. and in the South line of Subdivision 6 and said 1.069 acres tract for Southeast corner of this easement; THENCE S.85 degrees 20'W. 3.0 ft. with the North line of Glendale St. and the South line of Subdivision 6 and said 1.069 acres tract, to the point of BEGINNING. The foregoing description was prepared from that plat dated May 20, 1997 that correctly represents that actual ground survey made under my supervision. Dated this 23rd day of May, 1997. /s/ JOE L. HANEY - ----------------------------- Joe L. Haney, P.E., R.P.L.S. No. 3282 Haney Engineering and Surveying P.O. Box 307 408 N. Kaufman St., Mexia, Texas 76667 817-562-6954 57 FIRST AMENDMENT TO LEASE AGREEMENT THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "Amendment") is made and entered into by and between Parkview Regional Hospital, Inc., a Texas nonprofit corporation ("Landlord"), and Brim Hospitals, Inc., an Oregon corporation ("Tenant"), with respect to that certain Lease Agreement dated as of April 24, 1996, by and between Landlord and Tenant (such agreement, as amended from time to time, being the "Lease"). RECITALS Landlord and Tenant have previously entered into the Lease. Landlord desires to obtain financing for the purpose of completing certain improvements to the real property and improvements which are subject to the Lease (the "Premises"). Key Bank of Oregon, a national banking association ("Lender") has indicated its willingness to extend a loan for such purpose (the "Loan"), subject to certain terms and conditions set forth in a financing proposal dated March 18, 1996, and more fully set forth in a Construction and Term Loan Agreement of approximate even date herewith by and between Lender and Landlord (the "Loan Agreement") and the ancillary documents contemplated thereby or executed in conjunction therewith (such documents, together with the Loan Agreement, being the "Loan Documents"). It is a condition of Lender's willingness to proceed with the Loan that Landlord and Tenant enter into this Amendment, which is intended for the benefit of the Lender, as well as the parties hereto, but which evidences or incorporates no obligation on the part of Lender. TERMS AND CONDITIONS NOW THEREFORE THE PARTIES AGREE AS FOLLOWS: ARTICLE I DEFINITIONS SECTION 1.1. GENERAL. Any accounting term used herein but not defined herein shall be construed in accordance with the definition of such term under generally accepted accounting principles ("GAAP"); provided, that capitalized terms (including accounting terms) not otherwise defined herein, but defined in the Lease or the Loan Documents, shall be given the meaning indicated in those respective documents. 58 Section 1.2. Defined terms. As used in this Amendment: ADJUSTED TANGIBLE NET WORTH means Total (excluding intercompany receivables) Assets plus Subordinated Debt less (a) Total (including intercompany payables) Liabilities and (b) intangible assets including but not limited to long term prepayments, prepaid consulting fees, goodwill, organizational costs, patents, trademarks, franchise rights, licenses, permits and all other deferred assets according to GAAP. DEBT AND RENTAL EXPENSE means all payments due under leases of real or personal property, whether denominated as rent or otherwise, all interest expense in respect of money borrowed, and all payments of principal falling due during the relevant accounting period under any lease of real or personal property or obligation for money borrowed. BRIM means Brim, Inc., an Oregon corporation which is the parent corporation of Tenant. EBIT means net income after taxes plus interest expense plus income tax expense less extraordinary gain. EBITDAR means an amount determined by adding to EBIT all Rental Payments, Depreciation and Amortization, computed quarterly on the basis of the four most recent fiscal quarters. EQUIPMENT RENT means rent payable under equipment leases. FUNDED DEBT means the amount of Loans plus all other items of debt for money borrowed, reimbursement obligations in respect to bonds, letters of credit (but excepting letters of credit securing obligations which are themselves included in the computation of Funded Debt or Rent Leverage Equivalent) and acceptances, obligations to pay the deferred purchase price of property or services (other than trade payables), obligations secured by a lien on property, capital lease obligations, conditional sale agreements and obligations to redeem, defease or otherwise make any payments in respect to capital stock. GENERAL HOSPITAL DEBT means the total amount of debt secured by the General Hospital Facility (which debt has been incurred by lessor under the General Hospital Lease, but which is, by the terms of such lease passed through to the Company's Subsidiary as rent payable by the lessee under such lease). GENERAL HOSPITAL FACILITY means the Facility subject to the General Hospital Lease. -2- 59 GENERAL HOSPITAL LEASE means that certain Lease Agreement dated December 16, 1985 by and between Union Labor Hospital Association and Brim Hospitals, Inc., as amended from time to time. GUARANTIES means any contingent obligation of Tenant with respect to borrowed money or leases of real or personal property to the extent not already included in the computation of Total Leverage (but specifically excluding guaranties related to physician contracts. LETTER OF CREDIT means a Letter of Credit as defined in the Revolving Credit Agreement. LOANS means long term debt and current portion of long term debt. NON-RECOURSE INDEBTEDNESS means Indebtedness that is non-recourse to the Company and/or any Guarantor. NON-RECOURSE OPERATING LEASES means operating leases that are nonrecourse to the Company and/or any Guarantor. NON-RECOURSE RENT means all rent (including contingent rent) payable under Non-Recourse Operating Leases. RECOURSE RENT means all rent (including contingent rent) other than Non-Recourse Rent, rent payable under the General Hospital Lease, and Equipment Rent. RENT LEVERAGE EQUIVALENT means an amount equal to the sum of (i) General Hospital Debt plus (ii) the annual amount of each of Non-Recourse Rent, Recourse Rent and Equipment Rent, each element being first multiplied by the applicable conversion factor. The applicable conversion factors are: NonRecourse Rent = 6x, Recourse Rent = 8x, Equipment Rent = 3x. REVOLVING CREDIT AGREEMENT means that certain Revolving Credit Agreement by and among Brim, Lender, Key Bank of Washington, and Lender as Agent for the Banks (as defined therein) dated January 17, 1995. SUBORDINATED DEBT means Funded Debt of a Person which is subordinated, in a manner satisfactory to the Agent, to all Funded Debt owing to the Bank. TOTAL LEVERAGE means Funded Debt plus Rent Leverage Equivalent and the amount of any Guaranties. -3- 60 TOTAL ASSETS means all assets appearing on Lessee's balance sheet prepared in accordance with GAAP (except for divergences from GAAP customary as to quarterly unaudited statements). TOTAL LIABILITIES means all liabilities appearing on Lessee's balance sheet prepared in accordance with GAAP (except for divergences from GAAP customary as to quarterly unaudited statements). The foregoing definitions shall be applied with reference to the Financial Statements of Tenant, without consolidation with the Financial Statements of Tenant's parent corporation, Brim. SECTION 1.3. REFERENCES INCLUSIVE OF AMENDMENTS. Any reference in this Amendment to the Lease or any Loan Document shall refer, inclusively, to such document as it may from time to time be amended, modified or restated. SECTION 1.4. GENDER AND NUMBER IN CONTEXT. In this Agreement as the context may require the singular shall include the plural and the plural the singular, and each gender may include another. ARTICLE II TENANT'S FINANCIAL COVENANTS SECTION 2.1 CASH FLOW COVERAGE RATIO. Tenant will not permit at any time the ratio of EBITDAR to Debt and Rental Expense to be less than 1.75, which shall be calculated at the end of each fiscal quarter with respect to the four preceding quarters then ending. SECTION 2.2 MINIMUM ADJUSTED TANGIBLE NET WORTH. Tenant will not permit its Adjusted Tangible Net Worth to be at any time less than the Six Million Dollars ($6,000,000). SECTION 2.3 TOTAL LEVERAGE TO EBITDAR RATIO. Tenant will not permit at any time the ratio of Total Leverage to EBITDAR to be greater than 2.75, which shall be calculated at the end of each fiscal quarter with respect to the four preceding quarters then ending. SECTION 2.4 MEASUREMENT OF FINANCIAL COVENANTS. Compliance with the foregoing financial covenants shall be demonstrated with reference to the Tenant's financial statements prepared for each fiscal quarter as indicated above. SECTION 2.5 BREACH OF COVENANT CONSTITUTES LEASE DEFAULT. Tenant's breach of any covenant hereunder shall constitute an Event of Default under the Lease, and Landlord shall thereupon be entitled to all remedies provided for under the Lease. -4- 61 ARTICLE III ACKNOWLEDGEMENT OF SECURITY SECTION 3.1 ACKNOWLEDGMENT OF SECURITY. Tenant acknowledges that Lender is entering into the Loan Agreement and extending the Loan to Landlord in reliance upon the value provided by the Lease, and has taken an assignment for security of such Lease pursuant to the Loan Documents. Subject to the provisions of the Subordination Nondisturbance and Attornment Agreement, Tenant agrees to take no action to impair such security, or to frustrate or hinder Lender in its enjoyment or exercise of the rights afforded by the Loan Documents. SECTION 3.2 NO SETOFF AGAINST LENDER. Tenant agrees that in any action brought by Lender following an Event of Default under the Loan Documents to enforce rights under the Lease, Tenant will neither make nor assert any setoff or right to setoff against the rent payable under the Lease any sum asserted to be due to Tenant by Landlord under the terms of the Lease or otherwise. Without the consent of the Lender, Tenant will not make any payment of rent in advance of one month of when such rent is due and payable; any rent paid in violation of this section shall be directly recoverable from the Tenant by the Lender. SECTION 3.3 NO AMENDMENT OR TERMINATION. Without Lender's prior written consent, Landlord and Tenant shall not enter into any amendment of the Lease, or terminate the Lease, including any termination for breach by the Landlord (but excluding a lawful termination for breach by the Tenant), and any attempted termination of the Lease in violation of this Section shall be void and of no effect. ARTICLE IV MISCELLANEOUS SECTION 4.1 GOVERNING LAW. This Amendment, and the Lease as amended hereby, shall be governed, with respect to the interest in creates in the Real Property, by the laws of the State of Texas, but all other obligations created hereunder shall, to the extent permissible, be governed by the laws of the State of Oregon, and an action may be brought in any court of competent jurisdiction to enforce the provisions hereof; Landlord and Tenant specifically consent to the jurisdiction of any court of competent jurisdiction of the State of Oregon to hear and determine any action brought by Lender to enforce its rights hereunder or with respect hereto. SECTION 4.2 COUNTERPARTS. This Amendment may be executed in any number of counterparts, SECTION 4.3 SEVERABILITY. If any provision of this Agreement or the Note, or any action taken hereunder, or any application thereof, is for any reason held to be illegal or invalid, such illegality or invalidity shall not affect any other provision of this -5- 62 Agreement or the Note, each of which shall be construed and enforced without reference to such illegal or invalid portion and shall be deemed to be effective or taken in the manner and to the full extent permitted by law. SECTION 4.4 ENTIRE AGREEMENT. This Agreement, the Note and any other Loan Document integrate all the terms and conditions mentioned herein or incidental hereto and supersede all oral representations and negotiations and prior writings with respect to the subject matter hereof. In the event of any express conflict or express inconsistency between the provisions of this Agreement and the provisions of any of the other Loan Documents, the terms and conditions of this Agreement shall govern and control the rights and obligations of the parties. SECTION 4.5 JURY TRIAL WAIVER. COMPANY, AGENT AND EACH BANK EACH WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. SECTION 4.6 COUNTERPARTS. This First Amendment may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) document. IN WITNESS WHEREOF, THE PARTIES hereto have executed this First Amendment to Lease Agreement as of May 16, 1996. Landlord: PARKVIEW REGIONAL HOSPITAL, INC., a Texas nonprofit corporation By: ------------------------------------- ------------------------------------- Its: ------------------------------------- -6- 63 Tenant: BRIM HOSPITALS, INC., an Oregon corporation By: /s/ JOHN R. MILLER ----------------------- Its: President ----------------------- STATE OF TEXAS ) ) ss. COUNTY OF _____________ ) This instrument was acknowledge before me on the 16th day of May, 1996, by _____________________, ____________________________ of Parkview Regional Hospital, Inc., a non-profit Corporation, on behalf of the corporation. ______________________________ Notary Public State of Texas STATE OF OREGON ) ) ss. COUNTY OF Multnomah ) On this 16th day of May, 1996, before me personally appeared John Miller, to me known to be the President of Brim Hospitals, Inc., an Oregon corporation, the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument and that the seal affixed is the corporate seal of said corporation. GIVEN under my hand and official seal the day and year first above written. OFFICIAL SEAL /s/ LINDA J. BRYANT [SEAL] LINDA J. BRYANT ----------------------------------- NOTARY PUBLIC-OREGON Notary Public in and for the State COMMISSION NO.040767 of Oregon, residing at Salem, Oregon MY COMMISSION EXPIRES JAN. 17, 1999 My appointment expires: 1-17-99 -------- -7- 64 FIRST AMENDMENT TO LEASE AGREEMENT THIS FIRST AMENDMENT TO LEASE AGREEMENT (this "Amendment") is made and entered into by and between Parkview Regional Hospital, Inc., a Texas nonprofit corporation ("Landlord"), and Brim Hospitals, Inc., an Oregon corporation ("Tenant"), with respect to that certain Lease Agreement dated as of April 24, 1996, by and between Landlord and Tenant (such agreement, as amended from time to time, being the "Lease"). RECITALS Landlord and Tenant have previously entered into the Lease. Landlord desires to obtain financing for the purpose of completing certain improvements to the real property and improvements which are subject to the Lease (the "Premises"). Key Bank of Oregon, a national banking association ("Lender") has indicated its willingness to extend a loan for such purpose (the "Loan"), subject to certain terms and conditions set forth in a financing proposal dated March 18, 1996, and more fully set forth in a Construction and Term Loan Agreement of approximate even date herewith by and between Lender and Landlord (the "Loan Agreement") and the ancillary documents contemplated thereby or executed in conjunction therewith (such documents, together with the Loan Agreement, being the "Loan Documents"). It is a condition of Lender's willingness to proceed with the Loan that Landlord and Tenant enter into this Amendment, which is intended for the benefit of the Lender, as well as the parties hereto, but which evidences or incorporates no obligation on the part of Lender. TERMS AND CONDITIONS NOW THEREFORE THE PARTIES AGREE AS FOLLOWS: ARTICLE I DEFINITIONS Section 1.1. General. Any accounting term used herein but not defined herein shall be construed in accordance with the definition of such term under generally accepted accounting principles ("GAAP") provided, that capitalized terms (including accounting terms) not otherwise defined herein, but defined in the Lease or the Loan Documents, shall be given the meaning indicated in those respective documents. 65 Section 1.2. Defined terms. As used in this Amendment: ADJUSTED TANGIBLE NET WORTH means Total (excluding intercompany receivables) Assets plus Subordinated Debt less (a) Total (including intercompany payables) Liabilities and (b) intangible assets including but not limited to long term prepayments, prepaid consulting fees, goodwill, organizational costs, patents, trademarks, franchise rights, licenses, permits and all other deferred assets according to GAAP. DEBT AND RENTAL EXPENSE means all payments due under leases of real or personal property, whether denominated as rent or otherwise, all interest expense in respect of money borrowed, and all payments of principal falling due during the relevant accounting period under any lease of real or personal property or obligation for money borrowed. BRIM means Brim, Inc., an Oregon corporation which is the parent corporation of Tenant. EBIT means net income after taxes plus interest expense plus income tax expense less extraordinary gain. EBITDAR means an amount determined by adding to EBIT all Rental Payments, Depreciation and Amortization, computed quarterly on the basis of the four most recent fiscal quarters. EQUIPMENT RENT means rent payable under equipment leases. FUNDED DEBT means the amount of Loans plus all other items of debt for money borrowed, reimbursement obligations in respect to bonds, letters of credit (but excepting letters of credit securing obligations which are themselves included in the computation of Funded Debt or Rent Leverage Equivalent) and acceptances, obligations to pay the deferred purchase price of property or services (other than trade payables), obligations secured by a lien on property, capital lease obligations, conditional sale agreements and obligations to redeem, defease or otherwise make any payments in respect to capital stock. GENERAL HOSPITAL DEBT means the total amount of debt secured by the General Hospital Facility (which debt has been incurred by lessor under the General Hospital Lease, but which is, by the terms of such lease passed through to the Company's Subsidiary as rent payable by the lessee under such lease). GENERAL HOSPITAL FACILITY means the Facility subject to the General Hospital Lease. -2- 66 GENERAL HOSPITAL LEASE means that certain Lease Agreement dated December 16, 1985 by and between Union Labor Hospital Association and Brim Hospitals, Inc., as amended from time to time. GUARANTIES means any contingent obligation of Tenant with respect to borrowed money or leases of real or personal property to the extent not already included in the computation of Total Leverage (but specifically excluding guaranties related to physician contracts. LETTER OF CREDIT means a Letter of Credit as defined in the Revolving Credit Agreement. LOANS means long term debt and current portion of long term debt. NON-RECOURSE INDEBTEDNESS means Indebtedness that is non-recourse to the Company and/or any Guarantor. NON-RECOURSE OPERATING LEASES means operating leases that are nonrecourse to the Company and/or any Guarantor. NON-RECOURSE RENT means all rent (including contingent rent) payable under Non-Recourse Operating Leases. RECOURSE RENT means all rent (including contingent rent) other than Non-Recourse Rent, rent payable under the General Hospital Lease, and Equipment Rent. RENT LEVERAGE EQUIVALENT means an amount equal to the sum of (i) General Hospital Debt plus (ii) the annual amount of each of Non-Recourse Rent, Recourse Rent and Equipment Rent, each element being first multiplied by the applicable conversion factor. The applicable conversion factors are: NonRecourse Rent = 6x, Recourse Rent = 8x, Equipment Rent = 3x. REVOLVING CREDIT AGREEMENT means that certain Revolving Credit Agreement by and among Brim, Lender, Key Bank of Washington, and Lender as Agent for the Banks (as defined therein) dated January 17, 1995. SUBORDINATED DEBT means Funded Debt of a Person which is subordinated, in a manner satisfactory to the Agent, to all Funded Debt owing to the Bank. TOTAL LEVERAGE means Funded Debt plus Rent Leverage Equivalent and the amount of any Guaranties. -3- 67 TOTAL ASSETS means all assets appearing on Lessee's balance sheet prepared in accordance with GAAP (except for divergences from GAAP customary as to quarterly unaudited statements). TOTAL LIABILITIES means all liabilities appearing on Lessee's balance sheet prepared in accordance with GAAP (except for divergences from GAAP customary as to quarterly unaudited statements). The foregoing definitions shall be applied with reference to the Financial Statements of Tenant, without consolidation with the Financial Statements of Tenant's parent corporation, Brim. SECTION 1.3. REFERENCES INCLUSIVE OF AMENDMENTS. Any reference in this Amendment to the Lease or any Loan Document shall refer, inclusively, to such document as it may from time to time be amended, modified or restated. SECTION 1.4. GENDER AND NUMBER IN CONTEXT. In this Agreement as the context may require the singular shall include the plural and the plural the singular, and each gender may include another. ARTICLE II TENANT'S FINANCIAL COVENANTS SECTION 2.1 CASH FLOW COVERAGE RATIO. Tenant will not permit at any time the ratio of EBITDAR to Debt and Rental Expense to be less than 1.75, which shall be calculated at the end of each fiscal quarter with respect to the four preceding quarters then ending. SECTION 2.2 MINIMUM ADJUSTED TANGIBLE NET WORTH. Tenant will not permit its Adjusted Tangible Net Worth to be at any time less than the Six Million Dollars ($6,000,000). SECTION 2.3 TOTAL LEVERAGE TO EBITDAR RATIO. Tenant will not permit at any time the ratio of Total Leverage to EBITDAR to be greater than 2.75, which shall be calculated at the end of each fiscal quarter with respect to the four preceding quarters then ending. SECTION 2.4 MEASUREMENT OF FINANCIAL COVENANTS. Compliance with the foregoing financial covenants shall be demonstrated with reference to the Tenant's financial statements prepared for each fiscal quarter as indicated above. SECTION 2.5 BREACH OF COVENANT CONSTITUTES LEASE DEFAULT. Tenant's breach of any covenant hereunder shall constitute an Event of Default under the Lease, and Landlord shall thereupon be entitled to all remedies provided for under the Lease. -4- 68 ARTICLE III ACKNOWLEDGMENT OF SECURITY SECTION 3.1 ACKNOWLEDGMENT OF SECURITY. Tenant acknowledges that Lender is entering into the Loan Agreement and extending the Loan to Landlord in reliance upon the value provided by the Lease, and has taken an assignment for security of such Lease pursuant to the Loan Documents. Subject to the provisions of the Subordination Nondisturbance and Attornment Agreement, Tenant agrees to take no action to impair such security, or to frustrate or hinder Lender in its enjoyment or exercise of the rights afforded by the Loan Documents. SECTION 3.2 NO SETOFF AGAINST LENDER. Tenant agrees that in any action brought by Lender following an Event of Default under the Loan Documents to enforce rights under the Lease, Tenant will neither make nor assert any setoff or right to setoff against the rent payable under the Lease any sum asserted to be due to Tenant by Landlord under the terms of the Lease or otherwise. Without the consent of the Lender, Tenant will not make any payment of rent in advance of one month of when such rent is due and payable; any rent paid in violation of this section shall be directly recoverable from the Tenant by the Lender. SECTION 3.3 NO AMENDMENT OR TERMINATION. Without Lender's prior written consent, Landlord and Tenant shall not enter into any amendment of the Lease, or terminate the Lease, including any termination for breach by the Landlord (but excluding a lawful termination for breach by the Tenant), and any attempted termination of the Lease in violation of this Section shall be void and of no effect. ARTICLE IV MISCELLANEOUS SECTION 4.1 GOVERNING LAW. This Amendment, and the Lease as amended hereby, shall be governed, with respect to the interest in creates in the Real Property, by the laws of the State of Texas, but all other obligations created hereunder shall, to the extent permissible, be governed by the laws of the State of Oregon, and an action may be brought in any court of competent jurisdiction to enforce the provisions hereof; Landlord and Tenant specifically consent to the jurisdiction of any court of competent jurisdiction of the State of Oregon to hear and determine any action brought by Lender to enforce its rights hereunder or with respect hereto. SECTION 4.2 COUNTERPARTS This Amendment may be executed in any number of counterparts, SECTION 4.3 SEVERABILITY. If any provision of this Agreement or the Note, or any action taken hereunder, or any application thereof, is for any reason held to be illegal or invalid, such illegality or invalidity shall not affect any other provision of this -5- 69 Agreement or the Note, each of which shall be construed and enforced without reference to such illegal or invalid portion and shall be deemed to be effective or taken in the manner and to the full extent permitted by law. SECTION 4.4 ENTIRE AGREEMENT. This Agreement, the Note and any other Loan Document integrate all the terms and conditions mentioned herein or incidental hereto and supersede all oral representations and negotiations and prior writings with respect to the subject matter hereof. In the event of any express conflict or express inconsistency between the provisions of this Agreement and the provisions of any of the other Loan Documents, the terms and conditions of this Agreement shall govern and control the rights and obligations of the parties. SECTION 4.5 JURY TRIAL WAIVER. COMPANY, AGENT AND EACH BANK EACH WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT OR ANY NOTE OR OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO. SECTION 4.6 COUNTERPARTS. This First Amendment may be executed in any number of counterparts, each of which shall be enforceable against the parties actually executing such counterparts, and all of which together shall constitute one (1) document. IN WITNESS WHEREOF, THE PARTIES hereto have executed this First Amendment to Lease Agreement as of May 16, 1996. Landlord: PARKVIEW REGIONAL HOSPITAL, INC., a Texas nonprofit corporation By: ------------------------------ ------------------------------ Its: -------------------------- -6- 70 Tenant: BRIM HOSPITALS, INC., an Oregon corporation By: /s/ JOHN R. MILLER ----------------------- Its: President ----------------------- STATE OF TEXAS ) ) ss. COUNTY OF _____________ ) This instrument was acknowledge before me on the 16th day of May, 1996, by _____________________, ____________________________ of Parkview Regional Hospital, Inc., a non-profit Corporation, on behalf of the corporation. ______________________________ Notary Public State of Texas STATE OF OREGON ) ) ss. COUNTY OF Multnomah ) On this 16th day of May, 1996, before me personally appeared John Miller, to me known to be the President of Brim Hospitals, Inc., an Oregon corporation, the corporation that executed the within and foregoing instrument, and acknowledged said instrument to be the free and voluntary act and deed of said corporation, for the uses and purposes therein mentioned, and on oath stated that he was authorized to execute said instrument and that the seal affixed is the corporate seal of said corporation. GIVEN under my hand and official seal the day and year first above written. OFFICIAL SEAL /s/ LINDA J. BRYANT [SEAL] LINDA J. BRYANT ----------------------------------- NOTARY PUBLIC-OREGON Notary Public in and for the State COMMISSION NO.040767 of Oregon, residing at Salem, Oregon MY COMMISSION EXPIRES JAN. 17, 1999 My appointment expires: 1-17-99 -------- -7- EX-10.22 17 STOCK PURCHASE AND SALE AGREEMENT 1 EXHIBIT 10.22 STOCK PURCHASE AND SALE AGREEMENT This Stock Purchase and Sale Agreement is made and entered into as of this 27th day of November, 1996, by and among BRIM, INC., an Oregon corporation (the "Company"), CC-LANTANA, INC., a Delaware corporation ("Purchaser"), and Lee Zinsli, as agent (the "Agent"). RECITALS A. By Investment Agreement dated November 21, 1996 among the Company, Golda, Thoma, Cressey, Rauner Fund IV, L.P. and Principal Hospital Company (the "Investment Agreement"), the Company has agreed to cause a redemption of its preferred stock and certain shares of its common stock (the "Healthcare Transaction"). B. By Purchase and Sale Agreement dated November 25, 1996, the Company has agreed to sell to Plaza Enterprises, LLC, a newly formed limited liability company comprised of certain officers and employees of the Company, certain medical office buildings in Oregon, Arizona and California and certain assets and liabilities of the Company and certain of its subsidiaries relating thereto ("the "Excluded Assets Transaction"). C. In conjunction with the consummation of the Healthcare Transaction, the Company has agreed with the prospective purchaser thereunder that at the closing of said transaction the assets and liabilities of the Company will exclude those related to its senior living operations and the continuing care retirement community located in Palm Beach County, Florida and known as Freedom Village Lakeside (the "Facility"), which is operated by a limited partnership known as Meridian Park Village Limited Partnership, a Florida limited partnership (the "Partnership"), whose partners are Meridian (as hereinafter defined) and the Company. D. By Merger Agreement of even date herewith (the "BSL Merger Agreement"), the Company has agreed to sell its senior living business to a newly formed limited liability company known as Encore Senior Living, LLC ("Encore") through (i) a sale of capital stock of Brim Senior Living, Inc., the Company's wholly owned subsidiary ("BSL"), to Encore, and a merger of BSL into Encore (the "Merger"), with Encore as the surviving entity (the "Surviving Entity") and (ii) the purchase by Encore of certain assets and the assumption by Encore of certain liabilities related to the senior living business of the Company (the "Related Assets and Liabilities Transaction" and, together with the Merger, the "BSL Transaction"). E. The Company owns (i) all of the issued and outstanding capital stock of Meridian Senior Living, Inc. ("Meridian"), the sole general managing partner of the Partnership, and (ii) the sole limited partnership interest in the Partnership. F. By Purchase and Sale Agreement of even date herewith (the "LP Agreement"), the Company has agreed to sell to James Williams and David McAllister the Company's limited partnership interest in the Partnership (the "Limited Partnership Interest Transaction"). 1 2 G. The Company desires to sell and the Purchaser desires to buy the issued and outstanding capital stock of Meridian on the terms and conditions set forth herein. ARTICLE I DEFINITIONS As used in this Agreement the following terms shall have the following meanings: "Actions" -- as defined in Paragraph 4.09(a) hereof. "Additional Intercompany Debt"-- that portion of the Intercompany Debt in excess of the Contributed Intercompany Debt, the amount of which shall not exceed $1,950,000. "Agent" -- Lee Zinsli, on behalf of the Former Holders. "Agent/Legal Fees Expense Account"-- as defined in Paragraph 2.02(c) hereof. "Agreement"-- this Stock Purchase and Sale Agreement, including all exhibits and schedules hereto, as the same may be amended, modified or supplemented from time to time. "Anticipated Completion Date" -- in the case of the Housing Units shall mean December 16, 1996, and in the case of the Health Center shall mean May 1, 1997. "Architects" -- The Robinson Green Beretta Corporation. "Architects Agreements" -- That certain Agreement dated as of February 10, 1995, between the Partnership and The Robinson Green Beretta Corporation. "Benefit Arrangement" -- any written or oral employment, consulting, severance or other similar contract, arrangement or policy and each plan, arrangement, program, agreement or commitment providing for insurance coverage (including any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including, without limitation, any voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code providing for the same or other benefits) or for deferred compensation profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or benefits other than salary, which: (i) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (ii) is entered into, maintained, contributed to or required to be contributed to by the Company or any of its Subsidiaries or under which the Company or any of its Subsidiaries may incur any liability, and 2 3 (iii) covers any employee or former employee of the Company or any of its Subsidiaries (with respect to their relationship with such entities). "BNP" -- Banque Nationale de Paris, as agent for the Lenders, as defined in the BNP Loan Documents. "BNP Loan Amendment Commitment" -- that letter dated October 25, 1996, executed by BNP in favor of the Partnership. "BNP Loan Amendment Documents" -- as defined in Paragraph 7.01(l). "BNP Loan Documents" -- the First Mortgage Credit Agreement dated as of August 1, 1995, between BNP and the Partnership, concerning the Facility, together with the documents, agreements and instruments evidencing or securing the loans made by BNP to the Partnership in connection with the development of the Facility, as more particularly described in Schedule 1.1 attached hereto. "BSL Escrow Account" -- the Brim Senior Living Escrow Account established with the Escrow Agent in accordance with the Escrow Agreement and the BSL Merger Agreement. "BSL" -- as defined in the preamble hereof. "Budgets" -- the budgets for the development and operation of the Facility, as amended to date and as approved by BNP, a copy of which is attached as Schedule 1.2 hereto. "Business" -- the development, construction, marketing and operation of the Project. "CCI" -- Capital Consultants, Inc. "CCI Loan Amendment Commitment" -- that certain letter dated October 21, 1996, from James Williams to Jeffery L. Grayson, as acknowledged and accepted by that certain letter dated October 25, 1996 from Jeffery L. Grayson to James Williams. "CCI Loan Amendment Documents" -- as defined in Paragraph 7.01(m). "CCI Loan Documents" -- that certain Consolidated, Amended and Restructured Promissory Note dated as of August 1, 1995, of the Partnership, payable to CCI, together with the documents, agreements, and instruments evidencing or securing or relating to the loans made by CCI to the Partnership in connection with the development of the Facility, as more particularly described in the CCI Loan Documents. "Change Orders" -- those change orders under the Contractor Agreement or amending or modifying the Plans and Specifications that have occurred as of the date hereof with aspect to the construction of the Facility, all of which have been provided to the Purchaser. 3 4 "Closing" -- the consummation of the purchase and sale of the Common Stock as contemplated by this Agreement. "Closing Date" -- the date that the Closing occurs as determined in accordance with Article 3 hereof. "Code" -- the Internal Revenue Code of 1986, as amended. "Common Stock" -- as defined in Paragraph 4.02(a) hereof. "Company Financial Statements" -- as defined in Paragraph 4.05 hereof. "Confidentiality Agreements" -- as defined in Paragraph 10.02 hereof. "Contractor" -- Walbridge Contracting Company, Inc. "Contractor Agreements" -- those Agreements dated as of July 13, 1995 and July 14, 1995 between the Partnership and the Contractor with respect to (i) the Housing Units and Phase Ib Housing Units and (ii) the Health Center, respectively. "Contributed Intercompany Debt" -- the amount of Five Million One Hundred Fifty-five Thousand Two Hundred Sixty-four and no/100 Dollars ($5,155,264.00) of the Intercompany Debt, which will be contributed to Meridian by the Company at the Closing. "Debt" -- indebtedness or obligations for borrowed money, financing or capitalized lease obligations, obligations in respect of letters of credit, surety or other bonds, sale and leaseback transactions, all indebtedness secured by a lien on any asset, and any other liabilities generally regarded as indebtedness for borrowed money in accordance with GAAP, or any guarantees thereof or similar undertakings regarding the indebtedness or obligations of another. "Development Budget" -- the budget developed by the Partnership and approved by BNP with respect to the construction, equipping and marketing of the Facility, a copy of which is included within the Budgets. "Dispute Notice" -- as defined in Paragraph 11.03 hereof. "Employee Plans" -- all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans. "Environmental Claims" -- all notices of violations, liens, claims, demands, suits, or causes of action for any damage, including, without limitation, personal injury, property damage (including, without limitation, any depreciation or diminution of property values), lost use of property or consequential 4 5 damages, arising directly or indirectly out of Environmental Conditions or Environmental Laws. By way of example only (and not by way of limitation), Environmental Claims include: (i) violations of or obligations under any contract related to Environmental Laws or Environmental Conditions between the Company (or Meridian or the Partnership) and any other person, (ii) actual or threatened damages to natural resources, (iii) claims for nuisance or its statutory equivalent, (iv) claims for the recovery of response costs, or administrative or judicial orders directing the performance of investigations, responses or remedial actions under any Environmental Laws, (v) requirements to implement "corrective action" pursuant to any order or permit issued pursuant to the Resource Conservation and Recovery Act as amended, or similar provisions of applicable state law, (vi) claims related to Environmental Laws or Environmental Conditions for restitution, contribution, or indemnity, (vii) fines, penalties or liens of any kind against property related to Environmental Laws or Environmental Conditions (viii) claims related to Environmental Laws Or Environmental Conditions for injunctive relief or other orders or notices of violation from federal, state or local agencies or courts, and (ix) with regard to any present or former employers, claims relating to exposure to or injury from Environmental Conditions. "Environmental Conditions" -- the state of the environment, including natural resources (e.g., flora and fauna), soil, surface water, ground water, any present or potential drinking water supply, subsurface strata or ambient air, relating to or arising out of the use, handling, storage, treatment, recycling, generation, transportation, release, spilling, leaking, pumping, pouring, emptying, discharging, injecting, escaping, leaching, disposal, dumping or threatened release of Hazardous Substances by the Company, Meridian or the Partnership or its or their predecessors in interest, or by its or their agents, representatives, employees or independent contractors when acting in such capacity on behalf of any one or more of the Company, Meridian or the Partnership. With respect to environmental Claims by third parties. Environmental Conditions also include the exposure of persons to Hazardous Substances at the work place or the exposure of persons or property to Hazardous Substances migrating from or otherwise emanating from or located on the Facility. 5 6 "Environmental Laws" -- all applicable federal, state, district, local and foreign laws, all rules or regulations promulgated thereunder, and all orders, consent orders, judgments, notices, permits or demand letters issued, promulgated or entered pursuant thereto, relating to pollution or protection of the environment (including, without limitation, ambient air, surface water, ground water, land surface, or subsurface strata), including, without limitation, (i) laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants, chemicals, industrial materials, wastes or other substances into the environment and (ii) laws relating to the identification, generation, manufacture, processing, distribution, use, treatment, storage, disposal, recovery, transport or other handling of pollutants, contaminants, chemicals, industrial materials, wastes or other substances. Environmental Laws shall include, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). the Toxic Substances Control Act, as amended ("TSCA"), the Hazardous Materials Transportation Act as amended, the Resource Conservation and Recovery Act as amended ("RCRA"), the Clean Water Act, as amended, the Safe Drinking Water Act, as amended, the Clean Air Act, as amended, the Atomic Energy Act of 1954, as amended, the Occupational safety and Health Act, as amended ("OSHA"). the Hazardous Substance Account Act, Section 501.061 et. seq. of the Florida Statutes, as well as all local, municipal and county ordinances relating to environmental protection, and other environmental conservation or protection laws, and all analogous laws promulgated or issued by any state or other governmental authority. "Environmental Reports" -- any and all written analyses, summaries or explanations, in the possession or control of the Company, Meridian or the Partnership of (a) any Environmental Conditions in, on or about the Facility or (b) the compliance by the Company, Meridian or the Partnership with Environmental Laws. "ERISA" -- the Employee Retirement Income Security Ad of 1974, as amended. "ERISA Affiliate" -- any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with or under "common control," as defined in Section 414(b), (c), (m), (n) or (o) of the Code, with the Company or any of its Subsidiaries. "Escrow Account" -- the FV Escrow Account and the BSL Escrow Account. "Escrow Agreement" -- an agreement in the form of Exhibit A hereto. "Escrow Agent" -- Key Bank of Oregon. "Facility" -- the Housing Units and the Health Center. 6 7 "Florida ADA" -- as defined in Paragraph 4.21 hereof. "Florida CCRC Law" -- Chapter 651 of the Florida Statutes, Chapter 4.F.A.C. 4-193 of the Florida Administrative Code, and, if and to the extent applicable, the provisions of any other Florida Statutes incorporated therein by reference, and the rules and regulations promulgated under each, as well as all local, municipal and county ordinances relating to continuing care contracts or places where continuing care is furnished. "Former Holders" -- the Former Shareholders of the Company and the former holders of the Accelerated Options and/or Purchased Options (as such terms are defined in the Investment Agreement). "Former Holders of the Redeemed Stock" -- the shareholders of the Company whose junior preferred stock is redeemed at the Closing of the Healthcare Transaction. "Former Shareholders of the Company" -- the Former Holders of the Redeemed Stock and GECC, collectively. "FV Escrow Account " -- the interest-bearing account referred to in Paragraph 2.02(b) hereof and established under the Escrow Agreement. "GAAP" -- generally accepted accounting principles in effect as of the date hereof or, in the case of any Company Financial Statement, in effect as of the date thereof. "GECC" -- General Electric Capital Corporation. "Governmental Authority" -- any court, tribunal, arbitrator, authority, agency, department, commission, office, official or other federal, state, county, city or other governmental instrumentality or any state, county, city or other political subdivision. "Gross Up Account" -- that account established at the closing of the BNP Loan transaction in an amount equal to the difference between the deposits received and the deposits due with respect to the marketing of the Housing Units as security for the obligations of the Partnership under the BNP Loan Documents. "Hazardous Substance(s)" -- all pollutants, contaminants, chemicals, wastes, and any other carcinogenic, ignitable, corrosive, reactive, toxic or otherwise hazardous substances or materials (whether solids, liquids or gases) subject to regulation, control or remediation under Environmental Laws. By way of example only, the term Hazardous Substances includes: petroleum; urea formaldehyde; flammable, explosive and radioactive materials, as defined in any of the Environmental Laws; PCBs; pesticides; herbicides; asbestos; and sludge, slag, acids, metals, solvents and waste waters listed or otherwise defined as hazardous under any of the Environmental Laws. 7 8 "Health Center" -- that 60 bed long term care and 60 unit assisted living facility comprising a portion of the Facility and other related improvements and fixtures, as more particularly described in the Plans and Specifications and the Loan Documents. "Health Center Amendment" -- as defined in Paragraph 7.01(k)(ii). "Health Center Management Agreement" -- that certain Amended and Restated Management Agreement dated as of August 1, 1995, between the Partnership and BSL. "Healthcare Transaction" -- as defined in Recital A hereof. "Housing Management Agreement" -- that certain Amended and Restated Management Agreement dated as of August 1, 1995, between the Partnership and BSL. "Housing Occupancy Documents" -- The Lifecare Residency and Care Agreement, the Joinder Agreement, the Upgrade Letter (if and to the extent a prospective resident elects to request a unit upgrade) and the Reservation Agreement entered into by each resident or prospective resident of the Facility. "Housing Units" -- the 204 units of independent living retirement housing included in the Facility and other related improvements and fixtures, as more particularly described in the Plans and Specifications and the Loan Documents. "Income Taxes" -- any and all foreign, federal, state and local taxes, levies, duties and other assessments or charges of a similar nature (whether imposed directly or through with building), to the extent based upon or measured by income, including any interest, penalties or other additions to tax applicable thereto. "Indemnified Party" -- as defined in Paragraph 11.03 hereof. "Independent Accountants" -- the Portland Oregon, office of KPMG Peat Marwick LLP. "Interim Financial Statements" -- as defined in Paragraph 4.05 hereof. "Intercompany Debt" -- all of the Debt evidencing the loans from the Company to Meridian, which shall not exceed $7,005,264. "Joinder Agreement" -- the Joinder in Master Trust Agreement to be executed by each resident and by First Union National Bank of Florida, as Master Truster, at the time of his/her occupancy of a Housing Unit and pursuant to which such resident is designated as a "Grantor" under the Master Trust Agreement. 8 9 "Key Employee" -- all officers, managers and other employees of the Company or any of its Subsidiaries involved as of the date hereof and anticipated to be involved from and after the Closing Date in the day-to-day operations of the Facility's Business, whose current annual salary or rate of compensation (including bonus and other incentive compensation) is $100,000 or more. "Laws" -- any constitution, statute, law, rule, regulation or ordinance. "Leases" -- those leases to which the Company (with respect to the Facility), Meridian or the Partnership is a party. The Leases are described in Schedule 4.10(b)(i) attached hereto. "Liens" -- any liens, security interests, deeds of trust, pledges, charges, conditional sales contracts, mortgages or encumbrances. "Limitation Period" -- as defined in Paragraph 11.05(c) hereof. "Limited Partnership Interest Transaction" -- as defined in Recital F. "Loan Documents" -- the BNP Loan Documents and the CCI Loan Documents. "Loss Notice" -- as defined in Paragraph 11.03 hereof. "Losses" -- any and all claims, damages, losses, expenses, deficiencies, penalties, interest, fines, costs (including reasonable attorneys' fees and court costs), obligations or liabilities of any kind suffered or incurred because of a breach of one or more of the representations, warranties and covenants set forth in this Agreement or because of one or more Third Party Claims. "Loss Threshold" -- as defined in Paragraph 11.O5(a) hereof. "LP Agreement" -- as defined in Recital F, as the same may be amended, modified or supplemented from time to time. "Management Contract(s)" -- collectively, the Health Center Management Agreement and the Housing Management Agreement. The Management Contracts as described in Schedule 1.3 attached hereto. "Marketing Expenses" -- out-of-pocket third party costs and expenses incurred and paid by the Partnership consistent with the Budgets in connection with the marketing of the Project, and funded by the proceeds of a loan from the Company and not by proceeds of the BNP Loan. "Master Trust Agreement" -- the Master Trust Agreement dated as of August 1, 1995 among First Union National Bank of Florida, as Trustee, and the residents executing the Joinder Agreements, as "Grantors". 9 10 "Master Trust Documents" -- the Master Trust Agreement, the Master Trust Loan Agreement dated as of August 1, 1995 between the Master Trustee and the Partnership, the Master Trust Note, the Joinder Agreement, and the Agreement to Pay Expenses and Indemnification Agreement dated as of August 1, 1995 between First Union National Bank of Florida as Master Trustee and the Partnership. "Master Trust Note" -- the Master Trust Note dated as of August 1, 1995 executed by the Partnership in favor of the Master Trustee. "Material Adverse Effect" -- any event or events materially and adversely affecting (i) the Business, the Meridian Assets, the Project, the Partnership Assets, the business operations or affairs of the Partnership or (ii) the ability of the Company to perform its obligations hereunder. "Merger" -- the Merger as defined in Recital D hereof. "Meridian Assets" -- the Partnership Interest. "MLR Escrow Requirement" -- the requirement imposed by the Florida CCRC Law with respect to the establishment and maintenance of a minimum liquid reserve to meet the operating needs of the Facility. "Multi employer Plan" -- any "multi employer plan" as defined in Sections 3(37) or 4001(a)(3) of ERISA: (i) which any of the Company and its Subsidiaries, or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the six years prior to the Closing Date maintained, administered, contributed to or was required to contribute to, or under which any of the Company and its Subsidiaries or any ERISA Affiliate may incur any liability; and (ii) which covers any employee or former employee of any of the Company and its Subsidiaries or any ERISA Affiliate (with respect to their relationship with such entities). "New Partnership Agreement" -- that Amended and Restated Certificate and Agreement of Limited Partnership of Meridian Park Village Limited Partnership, to be effective as of the Closing Date, among Meridian Senior Living, Inc., as general partner and James Williams, David McAllister, Rick McDaniel, Bruce Schoen, Craig Rhea, Steve Fraser, Vern Reed and A.E. Brim, as limited partners, to be executed in the form attached hereto as Exhibit C upon the Closing. "Operating Budget" -- the budget with respect to the operation of the Facility developed by the Partnership and approved by BNP and included within the Budgets. "Occupancy Agreement"-- the Lifecare Residency and Care Agreement executed by each resident of the Housing Units. 10 11 "Orders" -- any injunction, judgment, decree, order, or writ. "Other Construction Contracts" -- those contracts described in Schedule 4.l0(b)(ii) attached hereto. "Other Required Agreements" -- as defined in Paragraph 7.01(k) hereof. "Outside Closing Date" -- as defined in Paragraph 3.03 hereof. "Partnership" -- as defined in Recital C. "Partnership Agreement(s)" -- that Amended and Restated Certificate and Agreement of Limited Partnership of Meridian Park Village Limited Partnership dated as of November 22, 1994 by and between Meridian Senior Living, Inc., as general partner, and the Company, as limited partner, which agreement is to be amended and restated, upon the Closing, by the New Partnership Agreement. "Partnership Assets" -- all right, title, interest and estate of the Partnership in the Project and other assets, if any, as described more fully in Schedule 4.02(c) attached hereto "Partnership Debt" -- the Debt evidencing the loans made by Meridian to the Partnership prior to the Closing, all of which loans are to be canceled and forgiven by Meridian immediately prior to the Closing. "Partnership Interest" -- the general partnership interest of Meridian, as the sole managing general partner of the Partnership. "Pension Plan" -- any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multi employer Plan): (i) which any of the Company and its Subsidiaries or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or within the five years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which any of the Company and its Subsidiaries or any ERISA Affiliate may incur any liability; and (ii) which covers any Employee or former employee of any of the Company and its Subsidiaries or any ERISA Affiliate (with respect to their relationship with such entities). "Permitted Exceptions" -- (i) any liens for taxes and assessments not yet due and payable; (ii) inchoate liens in favor of vendors, carriers, warehousemen, repairmen, mechanics, workmen, materialmen, construction or similar liens arising by operation of law in respect of obligations that are not yet due or that, after the date hereof, are contested in good faith and in 11 12 accordance with the terms of the Loan Documents and for which adequate reserves have been provided for on the Company Financial Statements or the Meridian Financial Statements; (iii) liens secured or evidenced by the Loan Documents; and (iv) easements, reservations, rights-of-way, restrictions, covenants, conditions and other similar encumbrances disclosed in the Title Report, which individually and in the aggregate do not materially and adversely affect the present and presently intended use or the marketability or insurability under the Title Policy of the Facility. "Personal Property" -- all tangible and intangible personal property, including furniture, equipment, supplies, inventory, and other personalty owned or acquired prior to Closing by the Partnership in connection with the Business, as described in or required by the Plans and Specifications and the Loan Documents, including all right, title, and interest now owned or acquired prior to Closing by the Partnership in and to the Reservation Agreements, Housing Occupancy Documents, bank and reserve accounts, and any licenses, permits and entitlements issued by Governmental Authorities. "Phase Ib Housing Units" -- the 46 independent living units to be constructed by the Partnership in accordance with and subject to the terms of the BNP Loan Documents, after completing and marketing the Housing Units. "Plans and Specifications" -- the plans and specifications and all addenda, modifications, supplements and change orders applicable thereto, previously provided to Purchaser and approved by BNP in accordance with the terms of the BNP Loan Documents. "Pre-Opening Expenses" -- out-of-pocket third party costs and expenses incurred and paid by the partnership consistent with the Budgets in connection with opening activities and funded by proceeds of a loan from the Company and not by proceeds of the BNP Loan. "Project" -- the Facility, Real Property, and the Personal Property, together with improvements and Personal Property that may be developed or acquired by the Partnership prior to Closing as described in the Plans and Specifications and the Loan Documents. "Project Permits" -- as defined in Paragraph 4.09 hereof. "Real Property" -- the real property located in Palm Beach County, Florida on which the Facility is, or upon completion of construction will be, located and more fully described in Exhibit B hereto. "Reimbursable Marketing Expenses" -- the lesser of(i) Marketing Expenses paid after July 31 1996 and on or prior to the Closing Date and (ii) the difference between $525,000 and any Marketing Expenses paid after the Closing Date and on or prior to December 31, 1996. 12 13 "Reimbursable Pre-Opening Expenses" -- the lesser of (i) Pre-Opening Expenses paid after July 31, 1996 and on or prior to the Closing Date and (ii) the difference between $630,000 and any Pre-Opening Expenses paid after the Closing Date and on or prior to December 31, 1996. "Reservation Agreement" -- the Agreement signed by each prospective resident of a Housing Unit in order to reserve his/her unit for future occupancy. "Reservation Deposit Escrow" -- the escrow account established by the Partnership with First Union National Bank of Florida into which all payments made under the Reservation Agreements are deposited in accordance with the requirements of the Florida CCRC Law. "Rights" -- as defined in Paragraph 4.02(a) hereof. "Subsidiary" -- a corporation, partnership or other entity (including the Partnership) 20% or more of the voting power or value of which is owned by the referenced corporation, partnership or other entity. "Survey" -- the Survey dated March 20, 1995, as updated on June 30, l996. July 10, 1996 and September 30, 1996 and prepared by Nick Miller, lnc. "Taxes" -- any and all foreign, federal, state and local taxes, levies, duties and other assessments or charges of a similar nature (whether imposed directly or through withholding), including any interest, penalties or additions to tax applicable thereto. "Third Party Consents" -- as defined in Paragraph 6.03(e) hereof. "Third Party Claim" -- as defined in Paragraph 11.03 hereof. "Title Commitment" -- that preliminary Title Report dated October 30, 1996 issued by the Title Insurer in favor of the Partnership. "Title Insurer" -- Flagler Title Insurance Company as agent for Chicago Title Insurance Company. "Title Policy" -- the existing owners's title insurance policy insuring the Partnership's title to the Facility and the Real Property, which as of the Closing Date, shall be endorsed to the reasonable satisfaction of Purchaser to make coverage effective as of the Closing Date, and to acknowledge the new partners of the Partnership. "UCC Search Report" -- the UCC Search Reports conducted by CSC in the name of the Company, the Partnership and Meridian in the States of Florida and Oregon and the Counties of West Palm Beach, Florida and Multnomah, Oregon, which reports art dated November ____, 1996. 13 14 "Upgrade Letters" -- that letter agreement pursuant to which a prospective resident, in consideration for the payment of a non-refundable deposit equal to the cost of construction of any requested upgrades, may request that certain upgrades be made to his/her reserved unit at his/her sole cost and expense during the course of the construction thereof. "Welfare Plan" -- any "employee welfare benefit plan" as defined in Section 3(1) of ERISA: (i) which any of the Company and any of its Subsidiaries or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which any of the Company and any of its Subsidiaries or any ERISA Affiliate may incur any liability; and (ii) which covers any employee or former employee of any of the Company and any of its Subsidiaries or any ERISA Affiliate (with respect to their relationship with such entities). Other References. References to articles, sections (or any subsections), schedules or exhibits are to those of this Agreement unless otherwise indicated. ARTICLE II PURCHASE AND SALE 2.01. On the terms and subject to the conditions set forth herein, the Company shall sell, convey, assign and deliver to Purchaser and Purchaser shall acquire from the Company all of the Common Stock (as defined below) of Meridian Senior Living, Inc. ("Meridian"). 2.02. On the terms and subject to the conditions set forth herein, Purchaser shall purchase the Common Stock and pay the purchase price by delivering: (a) One Million Nine Hundred Fifty Thousand and no/10 Dollars ($1,950,000), less the amount paid pursuant to paragraph 2.02(e) below, by wire transfer, in immediately available funds, to a bank account designated by the Company; (b) One Million and no/10 Dollars ($1,000,000), by wire transfer, in immediately available funds, to BNP in accordance with the BNP Loan Amendment Documents, which amount (or portion(s) thereof) when released by BNP shall be deposited to an interest bearing account established with the Escrow Agent (the "FV Escrow Account") to be held and applied by the Escrow Agent in accordance with the terms of the agreement applicable to such account; (c) Fifty Thousand and no/100 Dollars ($50,000) in immediately available funds to an interest bearing escrow account established with the Escrow Agent and designated as the "Agent/Legal Fees Escrow Account" to be held and applied by the Escrow Agent in accordance with the terms of the agreement applicable to such account; 14 15 (d) Four Hundred Thousand and no/100 Dollars ($400,000) in immediately available funds to a bank account designated by the Company, as partial repayment of the Additional Intercompany Debt; and (e) The difference between the Additional Intercompany Debt and Four Hundred Thousand Dollars ($400,000) in immediately available funds to a bank account designated by the Company, in payment in full of the remaining amount of the Additional Intercompany Debt. ARTICLE III CLOSING 3.01 Deliveries by the Company at Closing. In the event all of the conditions to Closing set forth in Article VIII have been satisfied or waived, the Company shall deliver the stock certificates representing all of the Common Stock, together with duly executed stock powers and all certificates, documents, exhibits, schedules, and other instruments and agreements required to be delivered by the Company or its counsel pursuant to Article VII of this Agreement, each of which shall be fully executed and completed, as appropriate. 3.02 Deliveries by Purchaser at Closing. In the event all of the conditions to Closing set forth in Article VII have been satisfied or waived, Purchaser shall deliver and/or cause its designees to deliver all of the certificates, documents, exhibits, schedules, and other instruments and agreements required to be delivered by Purchaser and/or its designees or its or their counsel, pursuant to Article VIII of this Agreement, each of which shall be fully executed and completed, as appropriate, and shall remit or cause to be remitted to the Company the consideration described in Paragraph 2.02. 3.03 Time and Place. The Closing shall occur at the Chicago office of Latham & Watkins at 10:00 am, local time, on December 13, 1996, provided that as of said date all of the conditions to Closing set forth in Articles VII and VIII have been satisfied by the responsible party or waived by the party entitled to waive the same (the "Closing Date"), or at such other time or on such other place as the Company and Purchaser may mutually agree, but in no event later than December 17, 1996 (the "Outside Closing Date"). In the event all of the conditions to Closing have not been satisfied or waived as of the Outside Closing Date, either party shall thereafter have the right to terminate this Agreement in accordance with the terms of Article X hereof. ARTICLE IV THE COMPANY'S REPRESENTATIONS AND WARRANTIES The Company does hereby represent and warrant to Purchaser as follows: 15 16 4.01. Organization and Qualification. (a) The Company is a corporation duly organized and validly existing under the laws of the State of Oregon. (b) Meridian is a corporation duly organized and validly existing under the laws of the State of Oregon. Meridian has all corporate power and authority necessary to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties. (c) Meridian is duly qualified, licensed or admitted to do business and is in good standing under the laws of the State of Florida. Meridian is not engaged in any business other than acting as the general partner of the Partnership and has no liabilities other than those incurred in its capacity as the general partner in the Partnership. (d) Meridian does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity, other than its interest as the general partner in the Partnership. (e) The Partnership is a limited partnership duly formed, validly existing and in good standing under the laws of the State of Florida. The Partnership has all partnership power and authority necessary to conduct the Business as now conducted and as currently proposed to be conducted and to own, use and lease its assets and properties. The Business is the only business in which the Partnership is currently engaged or has ever in the past been engaged. 4.02. Capital Stock/Partnership Interest. (a) The authorized capital stock of Meridian consists solely of 1,000,000 shares of common stock, without par value, 80,000 of which are issued and outstanding (the "Common Stock"). The Company owns all of the Common Stock beneficially and of record free and clear of all Liens, claims and encumbrances and with full right, power and authority to transfer such shares to the Purchaser. There are no outstanding subscriptions, options, warrants, rights (including "phantom" stock rights), preemptive rights or other contracts, commitments, understandings or arrangements, including any right of conversion or exchange under any outstanding security instrument or agreement (together, "Rights"), obligating Meridian to issue or sell any shares of its capital stock or to grant, extend or enter into any Right with respect thereto or any voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person with respect to the voting of or the right to participate in dividends or other earnings on any capital stock or other equity security of or interest in Meridian. (b) The Common Stock has been duly authorized, and is validly issued, fully paid and nonassessable. 16 17 (c) The Partnership Interest is the sole general partnership interest in the Partnership. Meridian owns the Partnership Interest beneficially and of record, free and clear of all Liens, claims and encumbrances and with full right, power and authority to transfer the Partnership Interest to the Purchaser. By its execution of this Agreement, the Company, as sole limited partner in the Partnership, hereby consents to the transactions contemplated herein. Except as contemplated by the New Partnership Agreement, there are no outstanding Rights obligating the Partnership to issue or sell any additional partnership interests or to grant, extend or enter into any Right with respect thereto nor any voting trusts, proxies or other commitments, understandings, restrictions or arrangements in favor of any person with respect to the voting of or the right to participate in any distributions or other equity security of or interest in the Partnership. (d) There are no outstanding obligations by Meridian or the Partnership to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any person, except that Meridian has funded and until the Closing may continue to fund Pre-Opening Expenses and Marketing Expenses. (e) Neither Meridian nor the Partnership owns an interest, directly or indirectly, in any other corporation, company, business trust, partnership, limited partnership, joint venture, or other entity or association, other than the Partnership Interest owned by Meridian. 4.03. Authority Relative to this Agreement. The Company has full corporate power and authority to enter into this Agreement and each other instrument, document and agreement contemplated hereby and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and of such other instruments, documents and agreements contemplated hereby by the Company and the consummation by the Company of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of the Company and no other corporate proceedings on the part of the Company are necessary to authorize the execution, delivery and performance of this Agreement and such other instruments, documents and agreements by the Company and the consummation by the Company of the transactions contemplated hereby and thereby, other than securing the approval of the shareholders of the Company for this and certain related transactions occurring concurrently herewith, which the Company shall use its best efforts to secure in accordance with the provisions of Paragraph 6.01(j). This Agreement and each other instrument, document and agreement contemplated hereby have been, or upon the execution and delivery thereof in accordance with the terms hereof will be, duly and validly executed and delivered by the Company and subject to securing the Regulatory Approvals and the Third Party Consents (as each such term is defined in Paragraph 6.03(e)) and the shareholder approval contemplated by Paragraph 6.01(j), constitute or, at the time of the execution and delivery thereof, will constitute a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 17 18 4.04. Approvals and Consents. The execution and delivery of this Agreement by the Company does not, and except for the consents to be obtained pursuant to the BNP Loan Amendment Documents and the CCI Loan Amendment Documents and the consent of the Department of Insurance of the State of Florida under the Florida CCRC Law to the transactions contemplated hereby and by the Limited Partnership Interest Transaction, the performance by the Company of its obligations hereunder and the consummation of the transactions contemplated hereby will not: (a) conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of or of notice under any agreement, contract, lease, license, permit, note, instrument or other document to which the Company, Meridian or the Partnership is a party or by which any of them is bound or to which any asset or property of any of them is subject, or (b) violate any Laws or Orders of a Governmental Authority, applicable to the Company, Meridian or the Partnership or any of its or their respective assets or properties, or the articles of incorporation or bylaws (or other comparable charter or organizational documents, including the Partnership's Partnership Agreement) of the Company, Meridian or the partnership, or (c) require any consent, approval or action of, or permit from, or filing, or registration with or notice to any Governmental Authority or other public or private third party. 4.05. Financial Statements. (a) On or before the date hereof, the Company has delivered to Purchaser the following (collectively, the "Company Financial Statements"): (i) a true and complete copy of the audited consolidated balance sheet of the Company and its consolidated Subsidiaries, including Meridian, and a true and correct copy of the audited balance sheet of the Partnership, each as of December 31, 1995 and the related statements of operations, stockholders' equity, and cash flows and the reports thereon by the Independent Accountants; (ii) a true and complete copy of the unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries, including Meridian, and a true and correct copy of the unaudited balance sheet of the Partnership, each as of October 31, 1996 and the related statements of operations, stockholders' equity and cash flow for the fiscal period ended on such date (the "Interim Financial Statements"); and (iii) an unaudited balance sheet of Meridian, as of the ten months ended October 31, 1996 and the related statements of operations, stockholders' equity, and cash flows for the fiscal period ended as of such date (the "Meridian Financial Statements"). 18 19 Except for the treatment of installment interest payments required under the CCI Loan Documents, the Company Financial Statements were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated therein or in the notes thereto), are in conformity with the books and records of the Company, and fairly present the consolidated financial position of the Company and its consolidated Subsidiaries, including Meridian and the Partnership) or Meridian, in the case of the Meridian Financial Statements, as at the respective dates thereof and the consolidated or combined, as applicable, results of their operations, stockholders' equity and cash flows for the respective periods then ended. 4.06. Absence of Certain Changes or Events. Except as set forth in Schedule 4.06 attached hereto, or as permitted by Article 6, since October 31, 1996 there has not been any: (a) change, event or development having, or that would be reasonably expected to have, an adverse effect on the Company with respect to the Business and/or on Meridian or the Partnership, except in the ordinary course of business consistent with past practice and involving not more than $50,000 in the aggregate. Nothing herein shall be construed as requiring the Company to disclose to Purchaser generally known changes in the congregate care/life care business which may, could or would have an effect on the Company, Meridian, the Partnership, the Business or Purchaser either prior to or after the Closing, it being understood and agreed that Purchaser and its shareholder are sophisticated investors in and purchasers of companies in the congregate care/life care business and can and will keep themselves advised as to any such general developments; (b) (i) person employed by Meridian or the Partnership and neither Meridian nor the Partnership has incurred any obligation to compensate or otherwise pay any of their respective officers or partners; (ii) adoption, creation or amendment of any Employee Plan of Meridian or the Partnership; (iii) amendment or modification to or execution of any employment agreement (written or verbal) made by the Company (with respect to the Business), Meridian or the Partnership or to which any of them is a party. (c) sale, lease, assignment or transfer of the Project, or any portion thereof, or any asset used in connection with the Business including, but not limited to, any development rights, air rights, utility rights, availability or capacity rights, easements or license rights or other similar rights, privileges or attributes with respect to the Project, or any portion thereof, including those arising under any zoning or land use ordinance or other Governmental Authority but specifically excluding the sale or leasing of the Housing Units to prospective residents of the Facility; (d) cancellation, compromise, waiver or release of any right or claim (or series of related rights or claims) of Meridian or the Partnership or related to the Project, except in the ordinary 19 20 course of business consistent with past practice and involving not more than $50,000 in the aggregate; (e) amendment, cancellation or termination of any agreement, contract, permit, license, note, instrument or other document of Meridian or the Partnership or related to the Project, except forgiveness of the Partnership's debt to Meridian and except in the ordinary course of business consistent with past practice and involving not more than $50,000 in the aggregate; (f) capital expenditure or the execution of any lease, contract, license, sublease or sublicense (or series of related contracts, leases, subleases, licenses and sublicenses) or any incurring of liability therefor by the Company and its Subsidiaries (with respect to the Business), Meridian or the Partnership, except in the connection with (i) the development of the Project in accordance with the Development Budget or (ii) the marketing of the Project in accordance with the Development Budget or (iii) the operation of the Project in accordance with the Operating Budget or (iv) any amounts expended in excess of or for items not reflected in the Budgets in the ordinary course of business consistent with past practice and involving not more than $50,000 in the aggregate; (g) failure to develop and market the Project in the ordinary course consistent with past practice, which failure has adversely affected (i) the Business, or (ii) the preservation for Purchaser of the goodwill of suppliers, customers, distributors and others having business relations with the Company with respect to the Business or with Meridian or the Partnership; (h) change in accounting methods or practices by the Company (with respect to the Project), Meridian or the Partnership; (i) grant of a Lien on any of the Project, the Meridian Assets, or the other Partnership Assets, or any interest therein, other than the Permitted Exceptions; (j) declaration, setting aside for payment or payment of any dividend or distribution in respect of any capital stock of Meridian or interest in the Partnership or any redemption, purchase, or other acquisition of any of Meridian's or the Partnership's equity securities or interests; (k) Debt, or any loan or guarantee incurred, entered into, made or agreed to be made by the Company (with respect to the Business) or by Meridian or the Partnership, except for Contributed Intercompany Debt, the amount of which shall be contributed to Meridian at Closing, the Additional Intercompany Debt, the amount of which shall be repaid at Closing as provided in Paragraph 2.02 of this Agreement, and the Partnership Debt, the amount of which is to be cancelled and forgiven immediately prior to the Closing; (l) liabilities incurred (other than for Debt) except with respect to (i) the development of the Project in accordance with the Development Budget or (ii) the marketing of the Project in accordance with the Development Budget or (iii) the operation of the Project in accordance with the Operating Budget or (iv) any amounts expended in excess of or for items not reflected in the Budgets 20 21 in the ordinary course of business consistent with past practice and involving not more than $50,000 in the aggregate; (m) acceleration, termination, material modification, cancellation or threatened acceleration, termination, material modification or cancellation of any contract involving more than $50,000 in the aggregate to which the Company (with respect to the Business), Meridian or the Partnership is a party or by which any of them is bound or to which any of the assets or properties of any of them is subject; (n) grant of any license or sublicense of any rights under or with respect to any intellectual property rights of the Company (which relate to the Business) or of Meridian or the Partnership; (o) written agreement or, to the knowledge of the Company, oral agreement by the Company, Meridian or the Partnership or any Personnel to do any of the foregoing; or (p) other event or condition of any character (other than events or conditions affecting the economy generally or the congregate care/life care business generally and other than events in the ordinary course of business) known to the Company that individually or in the aggregate would reasonably be expected to have an effect that is materially adverse on the Business, Meridian or the Partnership. Any activity permitted under this Paragraph 4.06 subject to a $50,000 in the aggregate limitation shall be permitted only to the extent that the aggregate amounts involved in all actions taken hereunder subject to such limitation does not exceed $50,000. 4.07. Legal Proceedings. (a) Except as described in Schedule 4.07(a) attached hereto, there is no charge, complaint, action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, investigation, audit, proceeding, labor dispute or arbitration proceeding (collectively, "Actions") pending or, to the knowledge of the Company, threatened or anticipated before any court, arbitrator or other public or private tribunal or before or by any federal, state, municipal or other governmental department, commission board, bureau, agency or instrumentality, domestic or foreign, relating to or affecting: (i) Meridian or the Partnership, the Meridian Assets or the Partnership Assets, or the Business, (ii) any Employee Plan of the Company with respect to the Facility or of Meridian or the Partnership or any trust or other funding instrument, fiduciary or administrator thereof, or (iii) the transactions contemplated by this Agreement. 21 22 (b) Neither the Company nor its subsidiaries (with respect to the Business) nor Meridian nor the Partnership is in default and there are no unsatisfied uninsured judgments against the Company (with respect to the Business), Meridian or the Partnership. 4.08. Information Supplied. Each document filed by the Company, Meridian or the Partnership or by the Company or Meridian on behalf of the Partnership with any Governmental Authority in connection with the Business or this Agreement and the other transactions contemplated hereby does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that no representation is made by the Company with respect to information supplied in writing by or on behalf of Purchaser expressly for inclusion therein. 4.09. Compliance with Laws and Orders. (a) Meridian and the Partnership hold all permits, licenses, variances, exemptions, orders and approvals of all Governmental Authorities necessary for the Business (the "Project Permits") to the extent the same can, in light of the Project's current state of development, be lawfully secured as of the date hereof and, to the extent the same cannot, in light of the Project's current state of development, be lawfully secured as of the date hereof, the Company has no reason to believe that the same should not be secured as and when necessary and appropriate and without unusual effort or expense, in the ordinary course of the Project's development; provided, however, that nothing herein shall be construed as a representation or warranty by the Company with respect to Purchaser's ability to secure any Project Permit the issuance of which depends on matters related to Purchaser and its affiliates, including, but not limited to, their financial condition and operational expertise. Each of the Project Permits issued to date is valid, has not expired or been revoked, and to the extent assignable will be assigned as necessary at Closing. (b) Except for a fine not to exceed $10,000 for past violations, each of Meridian and the Partnership is in compliance in all material respects with the terms of the Project Permits held by it, and none of Meridian, the Partnership or the Company (with respect to the Business) is in violation of or default under any Law or Order of any Governmental Authority applicable to it. 4.10. Compliance with Agreements; Certain Agreements. (a) Except for the contracts described in Schedule 4.10(a) or 4.10(b) attached hereto, none of the Company (with respect to contracts that relate to the business, assets, prospects or operation of Meridian, the Partnership or the Business) or Meridian or the Partnership is a party to, or bound by, any contract of any kind to be performed after the Closing Date pursuant to which it is obligated to spend more than $25,000 in any twelve month period and which is not subject to cancellation by it on thirty (30) or fewer days' notice. 22 23 (b) Schedule 4.10(b) attached hereto lists the following contracts and amendments to which the Company (with respect to contracts and amendments that relate to the Business) or Meridian or the Partnership is a party: (i) each Management Contract; (ii) each Lease; (iii) each Partnership Agreement; (iv) each agreement, contract or arrangement with any consultant, not terminable on 30 days' or less notice involving the payment of more than $25,000; (v) each Architects Agreement Contractor's Agreement and Other Construction Contracts entered into by the Company, Meridian or the Partnership for the development of the Facility; (vi) each union or collective bargaining agreement; (vii) each agreement, contract, arrangement, commitment or obligation with any employee the benefits of which are contingent or vest, or the terms of which are materially altered, upon the occurrence any of the transactions contemplated by this Agreement; (viii) each agreement, contract, arrangement, commitment or obligation with respect to any Key Employee involved in the Business other than salaries and benefits paid in the ordinary course of business; (ix) each agreement or plan, including any bonus, incentive compensation, stock option, stock appreciation right, restricted stock or stock purchase agreement or plan relevant to the Business, any of the benefits of which will be increased by, vested on an accelerated basis, or as a result of calculated or valued based on the occurrence of any of the transactions contemplated by this Agreement; (x) each agreement, contract, arrangement, commitment or obligation to which it is a party limiting in any material respect its freedom or the freedom of any Key Employee to compete in any line of business with any person; (xi) each agreement, contract, arrangement, commitment or obligation evidencing, securing or otherwise executed in connection with any liability for Debt in excess of $50,000; (xii) each agreement, contract, arrangement, commitment, understanding or obligation relating to it, its present or prospective business, operations, properties or assets in 23 24 which any Key Employee has any interest, direct or indirect, including a description of any transactions between it and any Key Employee or any entity in which any Key Employee has any interest (other than transactions between any corporation and a publicly held corporation in which the Key Employee holds less than five percent (5%) of the issued and outstanding shares of capital stock); and (xiii) each oral contract or agreement with respect to any of the matters referred to in the foregoing clauses (i) through (xii) and any oral or written proposal to enter into any contract, agreement or other arrangement with respect to any of the matters referred to in the foregoing clauses (i) through (xii). (c) The Company has delivered or made available to Purchaser a correct and complete copy of each contract or agreement listed in Schedule 4.10(b) attached hereto. With respect to each written agreement listed, to the Company's knowledge (based on a review of the files of the Company related to the Facility, of the files of Meridian and the Partnership, all as maintained at the corporate offices of the Company, inquiries of employees located at the corporate offices of the Company and involved in the Business, and inquiries of the onsite administrator at the Facility), (A) the written agreement is legal, valid, binding, enforceable (except as such enforceability may be limited by (i) bankruptcy, insolvency, moratorium, reorganization and other similar laws affecting creditors' rights generally and (ii) the general principles of equity, regardless of whether asserted in a proceeding in equity or at law) and in full force and effect; (B) no party is in material breach or default, and no event has occurred which with notice or lapse of time or both could constitute a material breach or default or permit termination, modification or acceleration, under the written agreement and (C) no party has repudiated any term of the written agreement, and there are no pending renegotiations of or outstanding rights to renegotiate any material amounts paid or payable by or to the Company (with respect to the Business) or Meridian or the Partnership thereunder and no such person has made written demand for such renegotiation. 4.11 Employees and Employee Benefit Plans (a) Employees. Attached as Schedule 4.11 hereto is a complete and accurate list of the name and hire date of the Key Employees. Except as provided by applicable law, the employment of all persons presently employed or retained by the Company (in connection with the Business) is terminable at will, at any time and without advance notice. (b) Employee Plans. Schedule 4.11(b) attached hereto contains a complete list of all Employee Plans. True and complete copies of each of the following documents for the Employee Plans will he delivered to Purchaser by the Company subsequent to the date of this agreement but prior to the Closing Date: (i) each Welfare Plan and Pension Plan (and, if applicable, related trust agreements and summary plan descriptions, all amendments thereto, and all annuity contracts or other funding instruments), 24 25 (ii) each Benefit Arrangement and a complete description of any such Benefit Arrangement which is not in writing, and (iii) for the three most recent plan years, Annual Reports on Form 5500 Series required to be filed with any governmental agency for each Welfare Plan and Pension Plan. (c) Pension Plans. No Pension Plan is subject to the minimum funding requirements of Title I of ERISA or Section 412 of the Code or Title IV of ERISA. Each Pension Plan and each related trust agreement, annuity contract or other funding instrument is qualified and tax-exempt under the provisions of Code Section 401(a) and 501(a) and has been so qualified during the period from its adoption to date. (d) Multi employer Plans. None of the Company, Meridian or the Partnership nor any ERISA Affiliate contributes to, or has been obligated to contribute to, any Multiemployer Plan. (e) Welfare Plans. None of the Company, Meridian, the Partnership nor any ERISA Affiliate has any present or future obligation to make any payment to or with respect to any present or former employee of the Company involved in the Business or of Meridian or the Partnership pursuant to any retiree medical benefit plan, other than as may be required by federal or state law. None of the Company (with respect to the Business), Meridian, the Partnership or any ERISA Affiliate involved in the Business has ever maintained, contributed to or been required to contribute to any "welfare benefit fund" as defined in Section 419(e) of the Code. Each Welfare Plan employed by the Company in connection with the Business, or by Meridian or the Partnership which is a "group health plan," as defined in Section 607(a) of ERISA, has been operated in compliance with provisions of Part 6 of Title I of ERISA and Sections 162(i) and 4980B of the Code at all times. (f) Compliance with Law. Each Welfare Plan, Pension Plan and Benefit Arrangement which covers or has covered employees of the Company involved in the Business or the employees of Meridian, the Partnership or any ERISA Affiliate involved in the Business has been maintained in compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, Pension Plan or Benefit Arrangement, including but not limited to, ERISA and the Code. (g) Deductibility of Payments. Then is no contract, agreement, plan or arrangement covering any employee or former employee of the Company involved in the Business that, individually or collectively, provides for the payment by the Company, Meridian or the Partnership of any amount: (i) that is not deductible under Section 162 or 404 of the Code; or (ii) that is an "excess parachute payment" under Section 280G of the Code. 25 26 (h) No Amendments. Except as may be necessary or appropriate in connection with closing the transaction contemplated by this Agreement, none of the Company (with respect to the Business) nor Meridian or the Partnership nor any ERISA Affiliate (involved in the Business) has any announced plan or any legally binding commitment to create any additional Facility Employee Plans or to amend or modify any existing Facility Employee Plan in effect. (i) No Acceleration of Rights or Benefits. Except for the vesting of existing stock options, neither the execution and delivery of this agreement nor the consummation of the transactions contemplated hereby will result in the acceleration of the exercisability of any stock options, the acceleration of the vesting of any restricted stock or any interest in any Pension Plan or Welfare Plan or the creation of rights under any severance, parachute or change of control agreement. (j) No Other Material Liability. No event has occurred in connection with any Facility Employee Plan which would have a Material Adverse Effect on any of the Company, Meridian or the Partnership or any ERISA Affiliate or any such Employee Plan, directly or indirectly under any statute, regulation or governmental order relating to any such Employee Plans. 4.12 Taxes. Each of the Company, Meridian and/or the Partnership has filed all Tax returns which are required as of the date hereof to have been filed by it in any jurisdiction with respect to the Business, the Project, the Common Stock, the Meridian Assets and the Partnership Assets and each has paid, before they have become delinquent, all Taxes shown to be due and payable on such returns and, to the knowledge of the Company, all other Taxes and assessments payable by the Company and by Meridian and/or the Partnership, to the extent the same have become due and payable, except for any Taxes and assessments the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company has set aside on its books, or has caused Meridian or the Partnership to set aside on its books, reserves to the extent required by, and segregated in accordance with, GAAP. The Company has no knowledge of any proposed material Tax assessment against the Company, Meridian or the Partnership. To the knowledge of the Company, all Tax liabilities of the Company, of Meridian and of the Partnership are adequately provided for on the books of the Company, Meridian or the Partnership, respectively. All of the Tax returns previously filed by the Company, Meridian or the Partnership and which, as of the date hereof, have not been audited by the applicable Governmental Authority having jurisdiction thereof, were true and correct in all material respects at the time filed by the Company, Meridian and/or the Partnership. None of the Company, Meridian or the Partnership has received any notice of any past due or unpaid Tax or assessment which as of the date hereof has not been paid or, is being contested in good faith by appropriate proceedings and is evidenced by an appropriate reserve on the books of the Company, Meridian or the Partnership, as applicable. 4.13. Labor Matters. No complaint for sex, age, race or other discrimination claim or any unfair labor practice claim has been brought against the Company (with respect to the Business), Meridian or the Partnership which is unresolved as of the date hereof. To the Company's knowledge, the Company (with respect to the Business), Meridian and the Partnership have complied 26 27 with all applicable state and federal labor Laws and Orders. None of the Company (with respect to the Business), Meridian or the Partnership is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by any of them. There are and have been no strikes, slowdowns, work stoppages, or lockouts at the Facility by any of the employees of the Company, Meridian or the Partnership. 4.14. Environmental Matters. Except as disclosed in the Environmental Reports given to Purchaser by the Company as described in Schedule 4.14 attached hereto: (i) The Company (with respect to the Project), Meridian and the Partnership are, and at all times during their ownership or operation of the Project have been, in compliance in all material respects with all Environmental Laws. (ii) There are no existing Environmental Claims against the Company (with respect to the Project), Meridian or the Partnership, and none of the Company (with respect to the Project), Meridian or the Partnership has received any notification of any allegation of any actual, or potential responsibility for, or any inquiry or investigation regarding, any disposal, release or threatened release at any location of any Hazardous Substance generated or transported by any of them at or from the Project. (iii) There are no underground tanks or other underground storage receptacles for Hazardous Substances currently located on or under the Project. (iv) There have been no releases (i.e., any past or present releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, disposing, or dumping) of Hazardous Substances in quantities exceeding the reportable quantities as defined under federal or applicable state law by the Company (with respect to the Facility), Meridian or the Partnership on, upon or into the Project except as allowed by Environmental Laws. In addition, the Company is not aware (without independent investigation) that there have been any such releases by the Company's or the Partnership's predecessors in title to the Real Property, and no releases in quantities exceeding the reportable quantities as defined under federal or state law on, upon, or into any real property in the vicinity of the Project other than those authorized by Environmental Laws which, through soil or ground water contamination, may have come to be located on the Real Property. (v) The Company is not aware of any PCBs located at the Project. (vi) There are no consent decrees, consent orders, judgments, judicial or administrative orders, agreements with (other than permits) or liens by, any governmental authority or quasi governmental entity relating to any Environmental Law which regulate, or bind the Company (with respect to the Project), Meridian or the Partnership. 27 28 (vii) True and correct copies of all existing Environmental Reports, as well as all other written environmental reports, audits or assessments which have been conducted, either by the Company (with respect to the Project), Meridian or the Partnership or any person engaged by any of them for such purpose which are in the possession of the Company, Meridian or the Partnership have been made available to the Purchaser. 4.15. Brokers or Finders. No agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, other than Smith Barney, which has acted as a financial advisor to the Company and which shall be compensated by the Company for its services rendered in connection therewith. 4.16. Insurance. Schedule 4.16 attached hereto sets forth the insurance policies maintained by the Company, Meridian or the Partnership covering the Business and the Project in effect as of the date hereof, including the policy numbers, terms, identity of the insurers and amounts and nature of coverage. All such policies (or replacements thereof) are now and will be until Closing in full force and effect, with no premium arrearages. True and correct copies of all such policies and any endorsements thereto have been or will be made available to Purchaser for its review prior to Closing. None of the Company, Meridian or the Partnership has received any written notice of any actual or proposed cancellation or limitation of coverage or non-coverage under any such policies and the Company, Meridian and the Partnership are in compliance (or are in the process of complying) with all underwriter requirements and recommendations of which any of them has been notified with respect to such policies. 4.17. Intellectual Property. None of the Company, Meridian or the Partnership has received protection under federal or state law of any trademarks, trade names, logos, service marks, patents, patent rights, assumed names, trade secrets or copyright used, or anticipated to be used, by them in the Business. 4.18. Certain Assets. (a) The Partnership has good and marketable title to, or valid fee simple title to the Real Property and all other real estate, if any, included in the Partnership Assets and good and marketable title to all of the Personal Property and other non-real estate assets included within the Partnership Assets (except that with respect to any improvements or Personal Property to be developed or acquired by the Partnership after the date hereof the Partnership will have good and marketable title only upon development or acquisition thereof). The Personal Property includes all the tangible assets reasonably necessary to the Business as it is currently conducted. The Development Budget includes the cost of such additional Personal Property as may be necessary in the reasonable opinion of the Company to conduct the Business as it is currently contemplated to be conducted. (b) The title of the Partnership to the o Project any part thereof is free and clear of all Liens other than (i) the Permitted Exceptions and (ii) any Lien which shall he satisfied and released 28 29 of record as of the Closing Date. The Facility and the Personal Property are in good working order, condition and repair and adequate and suitable for the purposes for which they are presently intended to be used. (c) Meridian has good and marketable title to the Partnership Interest free and clear of all Liens, claims and encumbrances. (d) None of the Company, Meridian or the Partnership has received notice of any pending or threatened condemnation or taking by power of eminent domain or otherwise of all or any portion of the Project or any of the other assets described in clauses (a) or (b) or any notice of any tax or special Lien or assessment which would not be paid in full by the Closing Date and for which Meridian or the Partnership would be liable. (e) None of the Company, Meridian or the Partnership has received notice of noncompliance of the Project, any portion thereof, or any of the other assets described in clauses (a) or (b) with applicable building or zoning codes and ordinances. 4.19. No Other Agreements to Sell the Assets of the Partnership or Capital Stock of Meridian. Neither the Company, Meridian nor the Partnership has any legal obligation, absolute or contingent, to any other person or firm to sell or effect a sale of the Stock, the Meridian Assets, the Partnership Assets or the Partnership Interest. 4.20. Books and Records. The Company, Meridian and the Partnership have made and kept (and given the Purchaser access to) books and records and accounts, which, in reasonable detail, accurately and fairly reflect the activities of the Company (with respect to the Business), Meridian and the Partnership, including but not limited the books and records related to the Reservation List, the Reservation Deposit Escrow and the Gross Up Account. None of the Company (with respect to the Business), Meridian nor the Partnership has engaged in any material transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in their normally maintained books and records. 4.21. Florida Americans With Disabilities Act Compliance. The Facility has been and is being constructed in full compliance with the Florida Americans with Disabilities Accessibility Implementation Act, Florida Statutes, Section 553.501, et seq and the rules and regulations issued pursuant thereto (the "Florida ADA"). None of the Company, Meridian or the Partnership has received any notice to the effect that, or has otherwise been advised that, the Facility is not in compliance with the Florida ADA. The Company believes that compliance with the Florida ADA constitutes compliance with the federal Americans with Disabilities Act. 4.22. Undisclosed Liabilities. The Company has not failed to disclose to the Purchaser any liabilities--whether fixed or contingent--actually known to the Company as of the date hereof with respect to the Business and not otherwise disclosed or taken into account in the Company Financial Statements or in the schedules or exhibits hereto. 29 30 4.23. The Real Property/The Facility. The Facility is located on the Real Property. The Housing Units, including their roofs and all major mechanical systems, such as air conditioning, electrical and heating and ventilating systems and other items of tangible Personal Property are, to the extent the same have been installed and at Closing shall be, to the extent the same have then been installed, in good operating condition and repair. 4.24. Master Trust and Occupancy Documents. The Company has furnished to the Purchaser true and correct copies of the Master Trust Documents and the Housing Occupancy Documents, together with the Reservation Agreements and/or Upgrade Letters, if applicable, executed by each prospective resident of the Housing Units who has not as of the date hereof elected to terminate such Reservation Agreement. Schedule 4.24 contains a form of a Joinder Agreement and a form of an Occupancy Agreement. The Joinder Agreement and the Occupancy Agreement between the Partnership and each Facility resident is not executed until the date occupancy of a reserved unit is accepted and accordingly no such agreements have been executed as of the date hereof. Each of the Reservation Agreements and the Master Trust Documents which has been executed as of the date hereof is in full force and effect and none has been modified or amended except as set forth in Schedule 4.24 attached hereto. The Housing Occupancy Documents constitute all written or oral agreements of any kind for the reservation, leasing, rental or occupancy of any portion of the Facility. Except as set forth in Schedule 4.24, no obligation under any of the Housing Occupancy Document has been collected in advance and there are no concessions, bonuses, rebates or other matters affecting the obligations of any prospective resident. None of the Company, Meridian or the Partnership is in default of any of its obligations under the Master Trust Documents or the Housing Occupancy Documents and there exists no fact or circumstance that, with the passage of time or the giving of notice or both, would constitute a default by the Company, Meridian or the Partnership or entitle any prospective resident to any counterclaim, offset or defense against such resident's obligation under his or her Housing Occupancy Documents. The Company is not aware of any default or any action which, with the passage or time or the giving of notice or both would constitute a default, under the Housing Occupancy Documents executed as of the date hereof by any of the prospective residents who are parties thereto. The Company represents and warrants that, as required by Florida law, under the terms of the Housing Occupancy Documents each prospective resident has the right to terminate the same within seven days after his/her entrance fee is paid and occupancy is accepted and that, although the Company has no knowledge that any prospective resident will exercise such rights, there can be no assurances that any or all of the prospective residents will not exercise said recision right. 4.25. Reservation List. Set forth in Schedule 4.25 is a true and correct reservation list as of November 1, 1996, which identifies each of the prospective residents of the Housing Units, the type of unit reserved by such resident, the monthly rent or occupancy fee attributable to each such unit, the amount of the deposit paid as of said date by each such resident, the amount of deposit remaining to be paid by such resident, and any price or other concession given to such resident (the "Reservation List"). All of the funds received by the Partnership from the residents on the Reservation List have been deposited in the Reservation Escrow Account, as required by the Florida 30 31 CCRC Law, and released therefrom and utilized by the Partnership in connection with the Business to the extent permitted by the Florida CCRC Law. 4.26. Operating Contracts. Set forth in Schedule 4.26 attached hereto are true and correct copies of all operating contracts to which the Company, Meridian or the Partnership is a party in connection with the Business (the "Operating Contracts"). Each of the Operating Contracts is in full force and effect and none of the Operating Contracts has been modified or amended except as set forth in Schedule 4.26. None of the Company, Meridian or the Partnership is in default of any obligations under the Operating Contracts nor is the Company aware of any default or any action which, with the passage or time or the giving of notice or both would constitute a default, under the Operating Contracts by any other party thereto. 4.27 Bank and Escrow Accounts. Schedule 4.27 hereto sets forth a correct and complete list of each bank account and escrow account maintained by the Company (with respect to the Facility), by Meridian or by the Partnership whether required by law, by the terms of the BNP Loan Documents or otherwise. 4.28. The Loan Documents. Neither the Company, Meridian nor the Partnership is in default of any of its obligations under the Loan Documents, nor is any of the Company, Meridian or the Partnership aware of or in receipt of notice from any lender thereunder of any event or circumstance which, with the giving of notice or the passage of time, or both would constitute an event of default thereunder. Each of the Loan Documents was duly authorized, executed and delivered by the Company, Meridian and/or the Partnership, as applicable, and each such document is the valid, binding and enforceable obligation of the Company, Meridian or the Partnership, as applicable, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). The Company has provided to Purchaser true and correct copies of the Loan Documents and all amendments, modifications or changes thereto other than those amendments, modifications and changes contemplated by the terms of the CCI Loan Amendment Commitment and the BNP Loan Amendment Commitment, which amendments, modifications and changes shall not be effective unless and until the Closing occurs. As of October 31, 1996, the principal amounts owing to BNP and CCI under the Loan Documents were $26,286,219.14 (plus accrued interest for October, 1996) and $9,329,995 (plus accrued interest on that amount through October 31, 1996 and plus unpaid interest in the escrow account with BNP of approximately $400,000 (the Gross-Up Account), plus approximately $400,000 of the Gross-Up Account), respectively. 4.29. Construction of the Facility. (a) The Company has provided Purchaser prior to the execution of this Agreement with a true and correct copy of the Plans and Specifications. The Plans and Specifications have not been 31 32 amended or modified except pursuant to the Change Orders referred to therein, which have been provided by the Company to Purchaser. The Project has been constructed to date in accordance and compliance with the Plans and Specifications, as amended or modified by such Change Orders. All changes orders have been approved as and when necessary under the terms of the Loan Documents. To the Company's knowledge, there are no latent or patent structural, mechanical or other defects in the Project. (b) The Real Property has available to its boundaries adequate utilities, including, without limitation, adequate water supply, storm and sanitary sewage facilities, telephone, gas, electricity and fire protection, as is required for the construction and operation of the Project. (c) The funds allocable to Phase I (as defined in the BNP Loan Documents) under the BNP Loan Documents, are sufficient to pay for the costs of construction of each of the Housing Units and the Health Center and other improvements necessary to the use and occupancy thereof cannot be completed and available for occupancy on or before the applicable Anticipated Completion Date in a good, workmanlike and substantial manner, free from material defects and in accordance with the Loan Documents, the Plans and Specifications, the Housing Occupancy Documents, and all applicable laws. To Seller's knowledge, all construction to date has been performed in a good and workmanlike manner, free from material defects and in accordance with all applicable laws. The Company represents and warrants that, as of the date hereof, it is anticipated that occupancy of 44 of the Housing Units will be accepted by prospective residents during the first week after the opening of the Housing Units. The Company believes that the prospective residents of Housing Units will move into such units on or about the move-in date ascribed to each in the Reservation List. The funds held back for Phase 1b Housing Units under the BNP Loan Documents are sufficient to pay for the costs of completion thereof in a good and workmanlike manner, free from material defects in accordance with all applicable laws. (d) Neither the zoning nor any other right to construct upon or to use the Facility is or when granted will be to any extent dependent upon or related to any real estate other than the Real Property, the improvement of such other real estate or the payment of any fees for the improvement of such other real estate. The Real Property is not part of a larger tract of land owned by either the Company, Meridian or the Partnership and is not otherwise included under any unity of title or similar covenant with other lands not owned by the Company, Meridian or the Partnership. The Project complies with all subdivision and platting requirements. (e) There are no soil conditions adversely affecting the Project, except, those if, any, as reflected in that Subsurface Exploration and Foundation Evaluation Report dated June 15, 1987, performed by Professional Service Industries, Inc. and that Report of Preliminary Subsurface Investigation dated August, 1993 performed by Nutting Engineers, copies of which have been delivered to the Purchaser. (f) The Project is fully zoned for its intended use. 32 33 (g) Neither the Company, Meridian nor the Partnership has received any notice that and, the Company has no knowledge as of the date hereof that, (i) any Governmental Authority or any employee or official thereof considers that the construction operation or use of the Project for its intended use will fail to comply in any, material respect with any legal requirements, (ii) any investigation has been commenced or is contemplated respecting any such possible use of the Project, and (iii) there are any unsatisfied requests for repairs, restorations or alterations with regard to the Project from any person, including, but not limited to, any lender, insurance carrier or Governmental Authority. (h) Except as set forth in Schedule 4.29(h) attached hereto, the Company has no reason to believe that the license or any other approvals, entitlements and other governmental and quasi-governmental authorizations, necessary for the operation or use of the Health Center for its intended use, will not be issued in the ordinary course of business after construction is complete. (i) Except as set forth in Schedule 4.29(i) attached hereto, no portion of the Real Property or the Facility is located in a designated flood zone. (j) Except as set forth in Schedule 4.29(j) attached hereto, none of the Company, Meridian nor the Partnership has paid or is obligated to pay any commissions in connection with the marketing of the Facility. (k) There is no obligation to satisfy the MLR Reserve Requirement under the Florida CCRC Law until the first resident is admitted to the Project at which time the obligation under the Florida CCRC Law with respect to the MLR Reserve Requirement will be satisfied by the amounts contained in the Reservation Deposit Escrow as reflected in the MLR Reserve Requirement calculation set forth in Schedule 4.29(k) attached hereto. At such time when 70% of the Housing Units are occupied, which is not currently contemplated to occur prior to January, 1998, the Partnership would be entitled in accordance with the provisions of the Florida CCRC Law to request a release of the funds in the Reservation Deposit Escrow, at which time the Partnership would be required to post cash and/or an acceptable letter of credit in satisfaction of the MLR Reserve Requirement. The Company has furnished to Purchaser a true and correct copy of the correspondence between the Partnership and the Department of Insurance with respect to the present calculation of the anticipated amount of the MLR Reserve Requirement. 4.30 Gross Up Account. The portion of the Gross Up Account attributable to the Purchaser (and not to CCI) exceeds $400,000. 4.31 Reimbursable Expenses. The sum of the Marketing Expenses and Pre-Opening Expenses exceeds $400,000. 4.32. Material Misstatements Or Omissions. No representations or warranties by the Company in this Agreement, nor any document, exhibit, statement, certificate or schedule or other injunction furnished or to be furnished to Purchaser (or its members) pursuant hereto, or in 33 34 connection with the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained therein not misleading. ARTICLE V PURCHASER'S REPRESENTATIONS AND WARRANTIES Purchaser does hereby represent and warrant to the Company as follows: 5.01. Organization and Qualification. (a) Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Purchaser has, or as of Closing will have, full corporate power and authority to conduct its business as and to the extent now conducted and to own, use and lease its assets and properties, including the assets and properties to be acquired by it pursuant to the terms of this Agreement. (b) Purchaser is or prior to the Closing Date will be duly qualified to do business in, and validly existing and/or in good standing under the laws of, the State of Florida if and to the extent necessary for it to acquire the Common Stock and to be the owner of the Partnership Interest. 5.02. Authority Relative to this Agreement. Purchaser has full corporate power and authority to enter into this Agreement and each other instrument, document and agreement contemplated hereby and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and of each other instrument, document and agreement contemplated hereby by Purchaser and the consummation by Purchaser of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of Purchaser and no other corporate proceedings on the part of Purchaser or its shareholders are necessary to authorize the execution, delivery and performance of this Agreement or such other instruments, documents and agreements by Purchaser and the consummation by Purchaser of the transactions contemplated hereby and thereby. This Agreement has been, and such other instruments, documents and agreements contemplated hereby when executed and delivered by Purchaser in accordance with the terms hereof will be, duly and validly executed and delivered by Purchaser and each such document constitutes or, upon the execution and delivery thereof will constitute, a legal, valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.03. Approvals and Consents. Subject to obtaining such consents or making such filings as are required to obtain the approval of the transactions contemplated herein by the Department of Insurance of the State of Florida under the Florida CCRC Law, the execution and delivery of this 34 35 Agreement by Purchaser does not and the performance by Purchaser of its obligations hereunder and the consummation of the transactions contemplated hereby will not: (a) conflict with, result in a violation or breach of, constitute (with or without notice or lapse of time or both) a default under, result in or give to any person any right of payment or reimbursement, termination, cancellation, modification or acceleration of, or of notice under any agreement, contract, lease, license, permit, note, instrument or other document to which Purchaser is a party or by which it is bound or to which any of the assets or properties of Purchaser are subject; or (b) violate any Laws or Orders of any Governmental Authority applicable to Purchaser or any of its assets or properties, or the Articles of Incorporation or Bylaws of Purchaser; or (c) require any consent, approval or action of, or permit from, or filing or registration with or notice to any Governmental Authority or other public or private third party. 5.04. Legal Proceedings. There are no actions, suits, arbitrations or proceedings pending or, to the knowledge of Purchaser, threatened against relating to or affecting, nor to the knowledge of Purchaser are there any investigations or audits by Governmental Authorities pending or threatened against, relating to or affecting Purchaser or any of its assets and properties which would adversely affect the Purchaser's ability to perform its obligations hereunder or to consummate the transactions contemplated hereby. 5.05. Information Supplied. Each document filed by Purchaser with any Governmental Authority in connection with this Agreement and the other transactions contemplated hereby, solely to the extent based on information provided by Purchaser, does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. 5.06. Brokers or Finders. No agent, broker, investment banker, financial advisor or other firm or person has been engaged by it and is or will be entitled to any broker's or finder's fee or any other commission or similar fee from it in connection with any of the transactions contemplated by this Agreement. 5.07. Investment Representations. Purchaser is acquiring the Common Stock for its own account and not with a view to their distribution, within the meaning of Section 2(11) of the Securities Act of 1933, as amended. Purchaser is a sophisticated investor regularly engaged in buying companies and interests therein. 35 36 ARTICLE VI COVENANTS 6.01. Company. The Company covenants, between the date hereof and the Closing, that: (a) The Company, Meridian and the Partnership shall conduct the Business in the ordinary course consistent with past practices and with the terms of the Budgets and shall preserve intact their business organization, keep available the services of the officers and employees involved in the Business in the ordinary course of business and use their commercially reasonable best efforts to maintain satisfactory relationships with suppliers, distributors, customers and others having business relationships with them with respect to the Business. (b) None of the Company, Meridian or the Partnership shall commit or omit to do any act that would cause a breach of any agreement, commitment or covenant of any of them contained in this Agreement or cause the representations and warranties as set forth in this Agreement to become untrue in any material respect as of the Closing Date. (c) Except with respect to the Limited Partnership Interest Transaction, none of the Company, Meridian or the Partnership shall make any material change in the Business or sell or agree to sell all or any portion of the Project, the Meridian Assets of the Partnership Assets or otherwise enter into, terminate, modify or amend any Housing Occupancy Documents, or any other agreements materially affecting the Project or the Business, without the prior written consent of Purchaser which consent, in the case of terminations, modifications to or amendments of any such agreements, shall not be unreasonably withheld. (d) Each of the Company (with respect to the Project), Meridian and the Partnership shall maintain its assets in the same condition as they are in at the date hereof, ordinary wear and tear, insured casualty loss and taking by eminent domain excepted. (e) None of the Company (with respect to the Facility), Meridian or the Partnership shall purchase an equity interest in, or the assets of, any corporation, partnership or any other entity, or create or permit any Lien on any asset, except for the Permitted Exceptions, or create, assume, incur or guarantee any Debt (other than the Contributed Intercompany Debt, the amount of which is to be contributed to Meridian at Closing, the Additional Intercompany Debt, the amount of which is to be repaid upon Closing as provided herein, and the Partnership Debt, the amount of which is to be canceled and forgiven immediately prior to the Closing as provided herein). (f) Except in the ordinary course of business and consistent with past practice, there shall be no increase in the compensation of any of the personnel or be, any consultant associated with the Business, nor shall there be any new employment, severance or other agreement with any of the personnel or any consultant associated with the Business (other than any such agreements executed by the Purchaser). 36 37 (g) During normal business hours, the Company will provide Purchaser, its agents and employees (or cause them to be provided), with access on twenty-four (24) hours notice to the books and records of the Company (with respect to the Facility). Meridian and the Partnership, provided they do not unreasonably interfere with the operations of the Company, Meridian or the Partnership. (h) Neither the Company nor any of the officers, directors, advisors nor others authorized to act on its behalf shall directly initiate or solicit discussions relating to any alternative acquisition proposal or similar transaction including, without limitation a merger or other business combination involving, to any extent, the Project, Meridian or the Partnership or offer to acquire or convey in any manner, directly or indirectly, all or substantially all of the equity interests in, or the voting securities of Meridian or the Partnership or the assets of either of them; provided, however, that public announcements of the transaction contemplated by this Agreement and responses to inquiries received thereafter shall not be prohibited hereby and that the Company shall not be deemed to be in breach of its obligations hereunder in the event the Board of Directors determines, prior to the approval of the transactions provided for herein and of the Excluded Assets Transaction, the BSL Transaction and the Healthcare Transaction by the shareholders of the Company, in the exercise of its fiduciary duties that the Company is required to provide information in response to any acquisition or merger proposals or discussions which are initiated by a third party; and provided, further, that nothing herein shall be construed as prohibiting the Company from pursuing the pending negotiations with respect to the Healthcare Transaction, the BSL Transaction or the Excluded Assets Transaction. (i) Neither the Articles of Incorporation nor the Bylaws of Meridian nor the Partnership Agreement of the Partnership shall be amended without the prior consent of the Purchaser, which consent shall not be unreasonably withheld. (j) The Company shall promptly submit this Agreement and the transactions contemplated herein, including the Healthcare Transaction, the BSL Transaction, the Limited Partnership Interest Transaction and the Excluded Assets Transaction, for the approval by its shareholders. Subject to its fiduciary duties under applicable law, the Board of Directors of the Company has agreed to recommend to its shareholders approval of the transaction contemplated herein, the BSL Transaction, the Healthcare Transaction, the Limited Partnership Interest Transaction and Excluded Assets Transaction. Subject to the fiduciary duties of the Board of Directors of the Company under applicable law, the Company shall use its reasonable efforts to obtain its shareholders' approval and adoption of this Agreement and the transactions contemplated hereby. Subject to the notice requirements of applicable state law, such meeting shall be held as soon as practicable following the execution of this Agreement. (k) Neither Meridian nor the Partnership shall declare or pay any dividend or other distribution to the Company or any other person. (1) During the continued construction of the Facility, the Company shall maintain or cause to be maintained the following insurance coverages: 37 38 (1) builder's risk (or equivalent coverage) insurance upon any work done or materials furnished under the Contractors Contracts and Other Contractors Contracts, except excavations, foundations and any other structures not customarily covered by such insurance, such policies to be written in completed value form for 100% of the insurable value of the improvements therefor; (2) workers' compensation and employer's liability insurance covering all Personnel and employees of contractors and subcontractors in amounts required by law; (3) automobile liability insurance covering owned, non-owned and hired automobiles of contractors and subcontractors in an amount not less than $1,000,000 combined single limit; and (4) commercial general liability insurance, including umbrella coverage, with combined coverage in amounts not less than $1,000,000 liability for personal injury for each occurrence and $2,000,000 in the aggregate and $1,000,000 for property damages for each occurrence and $2,000,000 in the aggregate. (m) The Company shall provide and continuously maintain or cause to be provided and maintained by the partnership or Meridian insurance coverages for the Business in such amounts and types as are currently maintained by it or them. (n) The Company shall promptly pay or cause the Partnership to pay all costs, expenses and obligations as and when due in respect of the continued development of the Project. Further, the Company shall not amend or modify or permit the Partnership or Meridian to amend or modify the Budgets without the prior approval of Purchaser. (o) No construction of the Project shall be undertaken except as shown in and in accordance with the construction Plans and Specifications, as amended by change orders approved by purchaser and by BNP in accordance with the terms of the BNP Loan Documents. (p) The Company, Meridian and the Partnership shall diligently pursue completion of the Project and shall use their commercially reasonable efforts to construct and market the Facility on the schedule set forth in the Development Budget and in accordance with the Plans and Specifications as amended by change orders approved by Purchaser and by BNP in accordance with the terms of the BNP Loan Documents. No marketing of the Facility shall be undertaken except in accordance with the terms, concessions and methods described in Schedules 4.24 and 6.01(p) attached hereto. The Partnership shall not enter into any Housing Occupancy Documents except those that are executed on the terms described in Schedules 4.24 and 6.01(p) and the forms of Housing Occupancy Documents provided to the Purchaser. (q) The Company shall deliver to Purchaser promptly upon request the names of all persons with whom the Company has contracted or intends to contract for any material work on the 38 39 Project. No change orders for the Project from and after the date hereof shall be effective without the prior written approval of Purchaser, except any change order that (i) does not extend the completion date, (ii) does not involve an increase in the approved construction cost of more than $5,000 for any one item or $10,000 in the aggregate,(iii) does not violate the terms of the Loan Documents and (iv) does not adversely affect the exterior of the Project or otherwise adversely affect any aspect of the aesthetics of the improvements. The Company shall not suffer or permit any breach or default to occur in any of the obligations of the Company, Meridian or the Partnership under any of the Architects Agreements, the Contractors Agreements, or the Other Construction Contracts necessary for the continued full ownership, construction, operation, maintenance and enjoyment of the Facility, nor shall the Company suffer or permit the same to terminate by reason of any failure of the Company, Meridian or the Partnership to meet any requirements thereof whatsoever. (r) The Company shall promptly notify Purchaser of the occurrence or existence of any event or circumstance which is or could reasonably be expected to be a breach of the representations, warranties and covenants of the Company relating to the construction of the Project. (s) The Company, Meridian and the Partnership shall perform their obligations under and comply with the applicable terms of the Loan Documents, the Housing Occupancy Documents, the Occupancy Agreements, the Contractors Agreement, the Other Contractors Agreements and the Architects Agreements. (t) The Company shall prepare and file all returns for Taxes of the Company and its Subsidiaries for all taxable years and other periods ending on or prior to or including the Closing Date. 6.02. Purchaser. Purchaser covenants that without the prior written consent of the Company, between the date hereof and the Closing, it shall not commit or omit to do any act that would cause a breach of any agreement, commitment or covenant contained in this Agreement or cause the Purchaser's representations and warranties as set forth in this Agreement to become untrue in any material respect as of the Closing Date. 6.03. Mutual Covenants. Following the execution of this Agreement and until the Closing Date: (a) The Company and Purchaser shall cooperate with each other and use their commercially reasonable efforts to procure all necessary and appropriate consents and approvals, complete and file all necessary and appropriate applications, notifications, filings and certifications, satisfy all requirements prescribed by law for, and all conditions set forth in this Agreement to, the consummation of the transactions contemplated hereby (without conditions adverse to any of the Purchaser, the Company, Meridian or the Partnership). (b) The Company and Purchaser shall deliver such other instruments of title, certificates, consents, endorsements, assignments, assumptions and other documents or instruments, in form 39 40 \ reasonably acceptable to the party requesting the same and its counsel, as may be reasonably necessary to carry out and/or to comply with the terms of this Agreement and the transactions contemplated herein. (c) The Company and purchaser shall confer with each other on a regular basis, report on material operational matters and promptly advise the other orally and in writing of any change or event having, or which, insofar as can reasonably be foreseen would have, a material adverse effect on the Company (with respect to the Project). Purchaser, Meridian, the Project or the Partnership, or which would cause or constitute a material breach of any of the representations, warranties or covenants of such party contained herein. (d) The Company and purchaser shall promptly provide each other (or its counsel) with copies of all filings made by such party with any state or federal governmental entity in connection with this Agreement or the transactions contemplated hereby. (e) Each of the Company and Purchaser will use its reasonable efforts to obtain prior to the Closing Date the consents, approvals, authorizations, licenses and other orders (and make such filings with any third party or Governmental Authority that each such party is required to obtain in order to permit (without conditions adverse to either of them or to Meridian or the Partnership) the consummation of the transactions contemplated by this Agreement. As used herein, "Third Party Consents" means the consents required of (a) BNP under the BNP Loan Documents, to be obtained in connection with the BNP Loan Amendment Documents, (b) CCI under the CCI Loan Documents, to be obtained in connection with the CCI Loan Amendment Documents and (c) the Department of Insurance of the State of Florida under the Florida CCRC Law. Each of the Company and Purchaser shall reasonably cooperate with the other party (which shall not include incurring any substantial additional liabilities or obligations other than costs and expenses which another party has agreed to reimburse) in connection with a party's efforts to obtain Third Party Consents which it is required to obtain; provided, however, nothing herein shall be construed as requiring Purchaser or any shareholder thereof to provide a guaranty or other security in order to obtain said Third Party Consents. (f) The parties shall consult with each other prior to the issuance by either party of any press release or any written statement with respect to this Agreement or the transaction contemplated hereby. ARTICLE VII PURCHASER CONDITIONS 7.01. Conditions Precedent to Purchaser's Obligations. The obligation of Purchaser to consummate the transactions provided for herein is subject to the fulfillment, or to the Purchaser's written waiver thereof, prior to or at the Closing Date, of each of the following conditions: 40 41 (a) The representations and warranties of the Company contained in this Agreement or in any certificate or document delivered in connection with this Agreement or the transactions contemplated herein shall be true and correct at and as of the Closing Date as though such representations and warranties were then again made, except for any breaches thereof or inaccuracies therein as would not, individually or in the aggregate, have a Material Adverse Effect. (b) The Company shall have performed and complied in all material respects with all covenants, conditions and agreements contained herein required to be performed or complied with by the Company prior to or at the Closing. (c) Except for such licenses to be issued or transferred by Governmental Authorities as may be required in connection with the operation of the Facility, but which cannot be obtained until completion of the Project occurs as a result of the applicable rules, procedures and practices governing the operation of facilities such as the Facility, either (i) no permits, consents, approvals, authorizations, waivers or other orders or filings with any third party or any Governmental Authority shall be necessary in connection with the authorization, execution, delivery and performance by the Company of all documents in connection with the transaction contemplated herein or (ii) the Company, Meridian, the Purchaser and the Partnership, as applicable, shall have obtained all such permits, consents, approvals, authorizations, waivers or other orders (without conditions which would materially adversely affect the Company, Meridian, the Partnership or Purchaser), including, but not limited to, all requisite approvals and consents from the Department of Insurance of the State of Florida under the Florida CCRC Law to the transaction contemplated herein. (d) The Company shall have delivered (i) a certificate of legal existence, as of a date within ten (10) days of the Closing Date, of each of Meridian and the Company by the Secretary of State of Oregon and (ii) a certificate of legal existence or good standing and authorization to transact business issued by the Secretary of State of the State of Florida for each of the Partnership and Meridian. (e) (i) The Company shall have delivered to Purchaser evidence of the consent of BNP and CCI to the transactions provided for herein and (ii) the Company shall have delivered to the purchaser a copy of the Partnership's November 1996 application for Advance under the BNP Loan Documents. (f) The Company shall have delivered to Purchaser a certificate updating to within no more than twenty (20) days prior to the Closing Date, the Reservation List and Schedules 4.24 and 4.25 attached hereto. (g) The Company shall have delivered to Purchaser an opinion of counsel to the Company, dated as of the Closing Date, in form and substance satisfactory to the Purchaser, as to customary matters. In rendering such opinion, counsel may rely as they deem advisable as to factual matters, upon certificates and assurances of public officials and officers of the Company, Meridian and the Partnership. 41 42 (h) The Company shall furnish the Purchaser with certificates evidencing compliance with the conditions set forth in this Article 7 as may be reasonably requested by Purchaser. (i) Each of the Company and Meridian, on its own behalf and in its capacity as the general partner of the Partnership, shall have delivered to the Purchaser a secretary's certificate certifying the truth and completeness of (i) director and stockholder corporate resolutions, fully and properly executed, evidencing authorization of the Company, Meridian and the Partnership, as the case may be, to execute, deliver and perform under the terms of this Agreement, including the Other Required Documents and including the exhibits hereto, which resolutions shall be attached to said certificate, and (ii) Meridian's articles of incorporation and bylaws, copies of which shall also be attached to said certificate and (iii) the Partnership's Partnership Agreement, a copy of which shall also be attached to said certificate. (j) No order shall be in effect restraining, enjoining or otherwise preventing the Closing. (k) The following documents and agreements shall be entered into prior to or at the Closing (the "Other Required Agreements"): (i) The Escrow Agreement. (ii) An Amendment, in form and substance reasonably acceptable to Purchaser, with respect to the Health Center Management Agreement which shall grant the Partnership the right to terminate the Health Center Management Agreement on thirty (30) days notice with or without cause (the "Health Center Amendment"). (iii) An Amendment to the Housing Management Agreement, in form and substance reasonably acceptable to Purchaser, the effect of which will be to permit the Partnership to terminate the same with or without cause at any time on no less than thirty (30) days notice to the manager (the "Housing Amendment"). (iv) An amendment to the Development Agreement, in form and substance reasonably acceptable to Purchaser, pursuant to which the fee due thereunder shall be reduced to $275,000 and shall be payable in full on the date on which a Certificate of Occupancy for the complete Facility is issued to the Partnership (the "Development Agreement Amendment"). (l) Any and all documents necessary to amend or modify the BNP Loan Documents shall have been executed and delivered by the parties thereto or the only condition to their delivery shall be the confirmation that the transaction which is the subject of this Agreement has been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject by all of the parties thereto and shall be in full force and effect and all such amendments or modifications shall be in form and substance acceptable to Purchaser (the "BNP Loan Amendment Documents"). 42 43 (m) Documents substantially in the form attached hereto as Exhibit D and any other documents deemed by Purchaser to be necessary thereto (the "CCI Loan Amendment Documents") shall have been executed and delivered by the parties thereto or the only condition to their delivery shall be the confirmation that the transaction which is the subject of this Agreement has been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject by all of the parties thereto and shall be in full force and effect. (n) There shall not have occurred any event or events constituting or having after June 30, 1996, either individually or in the aggregate, a Material Adverse Effect. (o) The Title Insurer shall have issued to the Partnership, or shall be irrevocably committed to issue to the Partnership, as of the date of Closing, endorsements (i) making the title insurance coverage effective as of the date of the Closing, and (ii) acknowledging the change in partners of the Partnership, which endorsements (the "Title Policy Endorsements") shall be in form and substance reasonably acceptable to Purchaser. (p) Purchaser shall be satisfied with the results of an update to the UCC Search, which update shall be dated no earlier than five (5) business days prior to the Closing Date. (q) The BSL Transaction shall be consummated or all of the documents and consideration necessary for the consummation thereof shall have been executed by the Company and delivered into escrow by the Company and the only condition for the release of said documents and consideration from escrow shall be the confirmation that the transaction which is the subject of this Agreement has been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject. (r) The Limited Partnership Interest Transaction shall be consummated or all of the documents and consideration necessary for the consummation thereof shall have been executed by the Company and delivered into escrow by the Company, the New Partnership Agreement shall have been signed by the limited partners thereunder and delivered into escrow and the only condition for the release of said documents and consideration from escrow shall be the confirmation that the transaction which is the subject of this Agreement has been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject. (s) The Company shall have delivered an estoppel certificates in substantially the forms attached hereto as Exhibit C from each of the Architects and the Contractor, as applicable. (t) The Company shall have delivered from First Union National Bank of Florida, as Master Trustee, estoppel certificate in form and substance satisfactory to Purchaser, confirming certain matters with respect to the Master Trust Documents. 43 44 ARTICLE VIII COMPANY CONDITIONS 8.01. Conditions Precedent to Company's Obligations. The obligation of the Company to consummate the transactions provided for herein is subject to the fulfillment, or to the Company's written waiver thereof, prior to or at the Closing, of each of the following conditions: (a) The representations and warranties of the purchaser contained in this Agreement or in any certificate or document delivered in connection with this Agreement or the transactions contemplated herein shall be true in all material respects at and as of the Closing Date as though such representations and warranties were then again made. (b) The Purchaser shall have performed and complied in all material respects with all covenants, conditions and agreements contained herein required to be performed or complied with by the Purchaser prior to or at the Closing. (c) Except for such licenses to be issued or transferred by Governmental Authorities as may be required in connection with the operation of the Facility but which cannot be obtained until after Closing occurs as a result of the applicable rules, procedures and practices governing the transfer of facilities such as the Facility and the re-licensure thereof in the name of the new owner or operator thereof, either no permits, consents, approvals, authorizations, or other orders or filings with any third party or any Governmental Authority shall be necessary in connection with the authorization, execution, delivery and performance by the Company, Meridian or the Partnership of all documents in connection with the transactions contemplated herein, or, except to the extent failure to do so would not have a Material Adverse Effect, the Company, Meridian or the Partnership, as applicable, shall have obtained all such permits, consents, approvals, authorizations, licenses and other orders (without conditions which would be materially adverse to the Partnership or Meridian) or made such filings with such third parties or Governmental Authorities as are necessary to obtain all such permits, consents, approvals, authorizations or other orders (without conditions which would be materially adverse to the partnership or Meridian) provided, however, that the ongoing shall not be a condition to the Company's obligation to close in the event the Purchaser waives the Company's inability to secure the same and from and after the Closing indemnifies, defends and holds harmless the Company from and against any Losses which it may incur as a result thereof. (e) Purchaser shall have delivered a certificate of legal existence and/or of good standing as of a date within ten (1O) days of the Closing Date issued by the Secretary of State of Delaware and of Florida if and to the extent Purchaser is required to be qualified to do business in Florida in order to purchase the Common Stock and to own the Partnership Interest. (f) Purchaser shall have delivered to the Company an opinion of counsel to Purchaser, dated as of the Closing Date, in form and substance satisfactory to the Company, as to customary 44 45 matters. In rendering such opinion, counsel may rely as they deem advisable as to factual matters, upon certificates and assurances of the Purchaser and public officials. (h) The Purchaser shall furnish the Company with certificates evidencing compliance with the conditions set forth in this Article VIII as may be reasonably requested by the Company. (i) The Purchaser shall have delivered to the Company an officer's certificate certifying the truth and completeness of (i) resolutions, fully and properly executed evidencing authorization of the Purchaser to execute, deliver and perform under the terms of this Agreement, including the Other Required Agreements, including the exhibits hereto, which Resolutions shall be attached to said certificate, and (ii) Purchaser's Articles of Incorporation and Bylaws, copies of which shall also be attached to said certificate. (j) No order shall be in effect restraining, enjoining or otherwise preventing the Closing. (k) The Purchaser shall have executed and delivered to the Company the Other Required Agreements. (l) The BSL Transaction shall be consummated or all of the documents and consideration necessary for the consummation thereof shall have been executed and delivered into escrow and the only condition for the release of said documents and consideration from escrow shall be the confirmation that the transaction which is the subject of this Agreement has been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject (provided that the Company's failure to execute and deliver any documents that it is required to execute and deliver pursuant to the agreements relating to the BSL Transaction shall not excuse the Company's performance hereunder). (m) The Healthcare Transaction shall be consummated or all of the documents and consideration necessary for the consummation thereof shall have been executed and delivered into escrow and the only condition for the release of said documents and consideration from escrow shall be the confirmation that the transaction which is the subject of this Agreement has been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject (provided that the Company's failure to execute and deliver any documents that it is required to execute and deliver pursuant to the agreements relating to the Healthcare Transaction shall not excuse the Company's performance hereunder). (n) The New Partnership Agreement shall have been signed by the Purchaser and delivered into escrow and the only condition for the release of said document from escrow shall be the confirmation that the transaction which is the subject of this Agreement has been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject. 45 46 (o) The BNP Loan Amendment documents shall have been executed and delivered or the only condition to their delivery shall be the confirmation that the transaction which is the subject of this Agreement has been consummated or the parties hereto are prepared to consummate the same, there being no other terms or conditions to which consummation of the same are subject. ARTICLE X TERMINATION 10.01. Termination. This Agreement may be terminated by the parties hereto upon the following conditions: (a) By mutual written consent of the parties; (b) By Purchaser, if the conditions to Closing set forth in Paragraph 7.01 have not been satisfied or waived by the Outside Closing Date. (c) By the Company, if the conditions to Closing set forth in Paragraph 8.01 have not been satisfied or waived by the Outside Closing Date. 10.02. Rights on Termination. Each party's right of termination under Paragraph 10.01 of this Agreement is in addition to any other rights it may have under this Agreement or otherwise and the exercise of a right of termination will not be an election of remedies. If this Agreement is terminated pursuant to Paragraph 10.01, all further obligations of the parties under this Agreement will terminate, except that the obligations under the Confidentiality Agreement dated May 8, 1996 (the "Confidentiality Agreement") will survive; provided, however, that if this Agreement is terminated by a party because of a breach of this Agreement by the other party then except as provided in Paragraph 10.03 hereof the terminating party's right to pursue all legal remedies will survive such termination unimpaired. 10.03. Default Fee. As security for the obligations of Purchaser hereunder and under the BSL Merger Agreement, Rockwood Living, Inc. has deposited with Key Bank of Oregon concurrently with the execution of this Agreement and the BSL Merger Agreement, cash or a single irrevocable letter of credit in the face amount of $250,000 issued by Bank of America (Illinois), N.A.. In the event this Agreement is terminated by the Company as a result of a breach by Purchaser of its obligations under this Agreement, the Company's sale remedy in the event of such breach shall be to draw against the Letter of Credit and the amount drawn shall constitute liquidated damages. Purchaser and the Company acknowledge and agree that this Paragraph 10.03 shall be the Company's exclusive remedy with respect to the Merger, the Related Assets and Liability Transaction described in the BSL Merger Agreement and all other transactions contemplated by this Agreement, including, but not limited to, the sale of the Common Stock. 46 47 ARTICLE XI INDEMNIFICATION 11.01. By Purchaser. In the event the Closing occurs, then from and after the Closing Purchaser shall defend, indemnify and hold harmless the Company from any Losses arising from or attributable to (i) claims made by third parties against the Company for payment or satisfaction of liabilities or obligations related to the assets, liabilities, operations and business of Meridian, the Partnership or the Project, including claims related to the completion of the construction of the Project and the working capital needs of the Project (except to the extent such liabilities or obligations are by the express provisions of Paragraphs 11.02(a)(i), (b) or (c) of this Agreement the liability or responsibility of Company), and (ii) the ownership and operation of Meridian, the Partnership and the Facility from and after the Closing Date. 11.02. By Company. In the event the Closing occurs, then from and after the Closing. (a) The Company shall indemnify and hold harmless the Purchaser and Meridian against all Losses incurred by either or both of them arising from: (i) liabilities and obligations of the Company and its Subsidiaries, including liabilities and obligations related to the assets, operations, liabilities and business that are retained by, or the liability or responsibility of the Company pursuant to the Healthcare Transaction but specifically excluding liabilities, obligations and Losses (x) which are the responsibility of Purchaser under Paragraph 11.01 hereof; or (y) which relate to the assets or liabilities which are the subject of the Excluded Assets Transaction (except to the extent such liabilities and obligations are by the express terms of the agreement relating to the Excluded Asset Transaction the liability or responsibility of the Company), and (ii) subject to the limitations set forth in Paragraph 11.05, a breach by the Company of its representations and warranties or a breach by the Company of its covenants set forth in this Agreement. (b) Without limiting in any way the obligations of the Company under Paragraph 11.O2(a) hereof, and notwithstanding any limitation contained in any provision of this Agreement (including, without limitation Paragraph 11.05 hereof), the Company shall indemnify and hold harmless the Purchaser and Meridian against: (i) all Income Taxes of the Company and its Subsidiaries, including Meridian and the Partnership, for each taxable year or other period ending on or before or including (for the portion of the taxable year through the close of business on) the Closing Date; and (ii) all Taxes of the Company and its Subsidiaries, including Meridian and the Partnership, attributable to the transactions contemplated by this Agreement, including the Merger, the Related Assets and Liabilities Transaction, the Limited Partnership Transaction, the Healthcare Transaction and the Excluded Assets Transaction, and also including the federal Income Taxes the Company has agreed to pay under Paragraph 9.01 of the BSL Merger Agreement; 47 48 (iii) any breach by the Company of its obligations under Paragraph 6.01(k) or Paragraph 12.07 hereof; and (iv) any dissenters' rights or other claims by former shareholders of the Company exercising dissenters' rights in connection with the fairness of the consideration paid in the transactions contemplated by this Agreement. (c) Without limiting in any way the obligations of the Company under Paragraph 11.02(a) hereof, and notwithstanding any limitation contained in any provision of this Agreement including, without limitation, Paragraph 11.05 hereof, the Company shall pay to the purchaser any amount previously paid by the Purchaser to the Company as a Reimbursable Marketing Expense or Reimbursable Pre-Opening Expense that did not qualify or should not have been treated as a Reimbursable Marketing Expense or Reimbursable Pre-Opening Expense and which Purchaser sets forth in a notice of claim relating thereto delivered to the Company within 120 days after the Closing Date. 11.03. Procedures. (a) Third Party Claims-In General. (i) A person seeking indemnification under this Article XI (the "Indemnified Party") shall give prompt notice to the party against whom indemnity is sought (the "Indemnifying Party") of the assertion of any third party claim or the commencement of any third party suit, action or proceeding in respect of which indemnity may be sought under this Article XI (collectively, a "Third Party Claim") provided, however that delay in giving any such notice shall relieve the Indemnifying Party of its obligations in respect of the Third Party Claim only to the extent the delay results in actual prejudice to the Indemnifying Party. (ii) If a Third Party Claim is covered by the indemnity under Paragraph 11.02 above, other than items referred to in Paragraphs 11.02(a)(i), (b) or (c) hereof, references herein to the Indemnifying Party shall be deemed to refer to the Agent, and purchaser will give a Loss Notice (as defined below) to the Escrow Agent and to the Agent in respect of such claim. If a Third Party Claim is covered by the indemnity in paragraph 11.02(a)(i), (b) or (c) hereof references to the Indemnifying Party shall be deemed to refer to the Company and Purchase will give a Loss Notice to the Company in respect of such claim. The Indemnifying Party shall have the right to participate in and control the defense of any such Third Party Claim, including any suit, action or proceeding relating thereto, at its own expense. If requested by the Indemnifying Party, the Indemnified Party shall reasonably and in good faith cooperate with the Indemnifying Party and its counsel in contesting any claim which the Indemnifying Party elects to contest, including, without limitation, the making of any related counterclaim against the person asserting the Third Party Claim or any cross complaint against any person or providing related statements or testimony. 48 49 (iii) If the Indemnifying Party does not notify the Indemnified Party in writing within twenty (20) business days of the Indemnifying Party's receipt of such Loss Notice of its intent to assume the defense of the Third Party Claim, the Indemnified Parry shall be entitled to take control of such Third Party Claim and the defense thereof at the Indemnifying Party's cost and expense (provided that the Indemnifying Party was obligated to indemnify the Indemnified Party hereunder and further provided that if such Third Party Claim is subject to the limitations described in Paragraph 11.05 hereof, then only to the extent of any funds on deposit in the Escrow Account as provided in Paragraph 11.05), which Third Party Claim shall be diligently prosecuted to a final conclusion or settlement; provided, however, that the Indemnified Party may settle such Third Party Claim as it may deem appropriate, in its discretion. (iv) The Indemnifying Party shall not be liable under this Article XI for any settlement effected without its consent of any Third Party Claim or any litigation or proceeding in respect thereof for which indemnity may be sought hereunder, except for any settlement as to which the Indemnifying Party did not assume the defense and for which the Indemnifying Party was obligated to indemnify hereunder. (b) Additional Provisions Applicable to Third Party Claims and Breaches of Representations, Warranties or Covenants to Paragraph 11.02(a)(ii). In the event that any circumstances exist or any claim is made or threatened against Purchaser after the Closing Date which the Purchaser believes has resulted or will result in the Purchaser incurring a Loss that is subject to the Company's indemnification obligation in Paragraph ll.O2(a)(ii) hereof: (i) Purchaser will promptly deliver to the Escrow Agent and to the Agent written notice (the "Loss Notice") setting forth a reasonable summary of the nature of the Loss and the facts giving rise thereto and specifying the Section of this Agreement to which such Loss relates and the amount thereof and, if the Loss Notice involves a Third Party Claim, a copy of such claim and the Purchaser's reasonable estimate of the amount sought by the third party. (ii) The Agent shall have the right to dispute the Company's responsibility for the Loss on behalf of the Former Holders by the delivery of written notice (the "Dispute Notice") to the Escrow Agent within twenty (20) business days after Purchaser's delivery of the Loss Notice to the Escrow Agent and the Agent. If the Agent fails to deliver a Dispute Notice within such twenty (20) business day period, or if the Agent timely delivers a Dispute Notice but does not contest therein all the items included in the Loss Notice, the Escrow Agent shall be authorized without further action by or approval of any party hereto to disburse from the Escrow Account the amount which is the subject of the Loss Notice (or the portion thereof that is not disputed in the Loss Notice) to, or as directed by, the Purchaser, except that, in the case of a Loss Notice which relates to a Third Party Claim, sufficient funds to cover the Losses which are the subject thereof shall be retained by the Escrow Agent in the Escrow Account until the final resolution thereof however effected, including by the decision of a court of competent jurisdiction or by decision made upon arbitration or other non-judicial or quasi-judicial dispute resolution or by a duly executed settlement agreement, at which 49 50 time the funds which the subject to any Loss Notice(s) shall be disbursed in accordance with the terms of any such order, decision or settlement, as applicable. (iii) In the event the Agent submits a Dispute Notice within the twenty (20) business day period provided for herein and the Agent and Purchaser are unable to resolve their differences within twenty (20) business days after the submission of a Dispute Notice, either the Agent or the Purchaser may submit the matters which are the subject of the Loss Notice to arbitration in accordance with the provisions of Paragraph 11.04 hereof and the Escrow Agent, the Agent and the Purchaser shall be bound by and shall act in accordance with the determination of the arbitrator. (iv) In the event of a Loss Notice which relates to a Third Party Claim, the matter submitted to arbitration shall be limited to whether the Third Party Claim involves the breach of a representation, warranty or covenant by the Company hereunder and the Dispute Notice shall state whether the Agent intends to assume the defense of such Third Party Claim and/or whether the Agent will permit the Purchaser and the Indemnified Parties to retain primary responsibility for the settlement or the defense thereof, subject to the Agent's right, at its expense, to retain counsel to monitor, but not to approve, any such defense or settlement negotiations. (v) The submission of a Dispute Notice to arbitration shall not relieve the Agent of its obligation, at its expense, to defend any Third Party Claim in the event it gives notice of its election to do so, unless and until it is determined in such arbitration that the Third Party Claim does not represent a breach of representation, warranty or covenant by the Company hereunder. (vi) In the event the arbitrator determines that a Loss Notice which relates to a Third Party Claim is not the subject of an indemnifiable loss under the terms of this Article 11, the Purchaser shall be required to reimburse the Agent for any and all costs and expenses incurred in defending such Third Party Claim until the Purchaser assumes the defense thereof, which shall in no event occur later than 10 days after such determination is made. In the event the arbitrator determines that a Loss Notice which relates to a Third Party Claim is the subject of an indemnifiable loss under the terms of this Article 11, the Arbitrator shall retain jurisdiction until a final determination of said Third Party Claim by order of a court of competent jurisdiction, by arbitration or other non-judicial or quasi-judicial proceeding or by a duly executed settlement agreement, at which time the arbitrator shall order disbursement of the funds from the Escrow Account in accordance with such order or settlement. (c) Other Claims. Promptly upon learning of the grounds of a claim for indemnification that is subject to Paragraph 11.O2(a)(i), (b) or (c) hereof, the Purchaser shall deliver to the Company a Loss notice specifying in reasonable detail the grounds and amount of such claim. If such claim is not resolved in sixty (60) days after such delivery, the Purchaser may exercise any rights and pursue any remedies it may have hereunder, at law or otherwise in respect of such claim directly against the Company. 11.04. Arbitration. 50 51 (a) Any matters which are the subject of the indemnity provisions of this Article XI shall be submitted for resolution to arbitration in Portland, Oregon, or such other location as the Purchaser and the Agent may agree to, under the Commercial Arbitration Rules of the American Arbitration Association to which shall be added the provisions of the Federal Rules of Civil Procedure relating to the Production of Evidence. Such arbitration shall be presided over by a single arbitrator. If the Purchaser and the Agent do not agree on the arbitrator within twenty (20) business days after the delivery by Agent of a Dispute Notice, the arbitrator shall be selected by them from a list of five potential arbitrators provided by the American Arbitration Association. Such list shall be provided within 10 days of the expiration of said twenty (20) business day period (or as soon thereafter as the American Arbitration Association is able to do so); provided that if the American Arbitration Association shall not have provided such a list within 20 days after the expiration of said twenty business day period, then the arbitrator shall be designated by the presiding judge of the county in which such arbitration is held. The Agent shall delete one name from the list. The Purchaser shall delete one name from the list. This process shall then be repeated in the same order and the last remaining person on the list shall be the arbitrator. This selection process shall take place within the two business days following both parties' receipt of the list of five potential arbitrators. Hearings in such arbitration proceeding shall commence within 20 days of the selection of the arbitrator or as soon thereafter as the arbitrator is available. The arbitrator shall deliver his or her opinion within 20 days after the completion of the arbitration hearings. The arbitrator's decision shall be final and binding upon the parties, and may be entered and enforced in any court of competent jurisdiction by either of the parties. (b) Unless otherwise ordered by the arbitrator, the arbitrator's expenses shall he borne by the non-prevailing party. 11.05 Limitation on Claims. (a) Purchaser shall have no right to recover with respect to any Losses until the amount of all such Losses is equal to or greater than $150,000 individually or in the aggregate (the "Loss Threshold"). (b) Except with respect to the items referred to in Sections 11.02(a)(i), (b) or (c), as to which the Loss Threshold shall not apply, Purchaser shall only be entitled to recover Losses suffered or incurred by it in excess of the Loss Threshold. (c) Any and all claims for the recovery of losses (other than claims against the Company under Paragraphs 11.02(a)(i),(b)(except as relates to Paragraph 6.01(k) hereof) or (c) hereof) must be brought by purchaser within one year after the Closing Date and any claim for recovery of any Loss under Section 11.O2(b)(iii) as relates to Section 6.01(k) must be brought by Purchaser within eighteen months after the Closing Date (in each case, the "Limitation Period"); provided, however, that Purchaser acknowledges and agrees that it shall not be entitled to draw on the FV Escrow Account (or otherwise be indemnified from a source other than the Escrow Account) as compensation for any Losses suffered by it and with respect to which it is entitled to be indemnified 51 52 hereunder until the same or so much thereof as may then be remaining has been delivered to the Escrow Agent by BNP upon the release of BNP's interest in such account pursuant to the BNP Loan Amendment Documents. Any claim against the Company under Paragraph 11.02(a)(i),(b) or (c) hereof shall not be limited to or satisfied by the amount in the Escrow Account and may be brought (except as provided in Paragraph 11.O2(c) hereof and except with respect to Paragraph 11.02(b) as relates to Section 6.01(k) hereof) at any time prior to the expiration of the statute of limitations applicable with respect to such claim. (d) Except for items referred to in Paragraphs 11.02 (a)(i), (b) or (c) hereof, the Purchaser's recourse for any and all such Losses pursuant to Paragraph 11.02 shall be limited to the funds on deposit in the Escrow Account, as the Escrow Account may be reduced by payments therefrom pursuant to the provisions of this Agreement (or the agreement relating to the BSL Transaction). (e) Any and all funds remaining in the Escrow Account at the end of the Limitation Period (the "Remaining Escrowed Funds"), including any remaining interest income, shall be released in accordance with the Escrow Agreement; provided, however, that as to any Loss Notices submitted prior to the expiration of the Limitation Period, including Loss Notices submitted to the Company under Paragraph 11.03(e) hereof in excess of the Loss Threshold or the Financial Statement Loss Threshold, as applicable, which remain unresolved at the end of the Limitation Period, sufficient funds to cover the Losses which are the subject thereof shall be retained by Escrow Agent in the Escrow Account until the final solution thereof however effected, including in accordance with the arbitration procedures set forth in Paragraph 11.04, or, in the case of a Third Party Claim by the decision of a court of competent jurisdiction or upon arbitration or other non-judicial or quasi-judicial decision made or by a duly executed settlement agreement, at which time the funds which are the subject of any such Loss Notice(s) shall be disbursed in accordance with the terms of any such order, decision or settlement, as applicable. 11.06. Further Assurances. The parties agree to execute and to deliver any and all documents as may be reasonably requested by the Escrow Agent to evidence its assumption of the duties and obligations provided for herein. 11.07. Mitigation. Each Indemnified Party will use reasonable efforts to mitigate any Losses for which it may claim indemnification under this Article XI. Further, the indemnities provided by this Article XI shall apply only to Losses for which the Indemnified Party is not, or is not entitled to be reimbursed through third party insurance. 11.08. Adjustment to Purchase Price. Amounts paid for indemnification under this Article XI shall be deemed to be an adjustment to the Purchase Price. 11.09. Income Taxes. The Company acknowledges and agrees that the funds in the Escrow Account shall be deemed for purposes of the tax laws to be the property of the Purchaser and accordingly that Purchaser shall be required to pay Income Taxes on any interest earned thereon. 52 53 The Company further acknowledges and agrees that the Purchaser shall have the right to withdraw from interest earned on the Escrow Account sufficient funds to pay said income taxes and that any interest on the Escrow Account available for disbursement pursuant to the terms hereof shall be reduced by such amount. 11.10. Access to Books and Records. From the Closing Date until the final determination of any matters which are the subject of a Loss Notice and a Dispute Notice, the Agent and his representatives will have such access to the books, records and accounts of the Purchaser and its employees as is relevant to the resolution of such matters. ARTICLE XII MISCELLANEOUS 12.01. Notices. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall he sent by registered or certified mail, postage prepaid, by overnight delivery, hand delivery or facsimile transmission to the following address: To the Company: Brim, Inc. 305 NE 102nd Avenue Portland, Oregon 97220 Attn: A.E. Brim Phone: 503-256-2070 Fax: 503-254-7619 With copy to: The Nathanson Group 1411 Fourth Avenue, Suite 905 Seattle, WA 98101 Attn: Randi S. Nathanson Phone: 206-623-6239 Fax: 206-623-1738 To Purchaser: CC-Lantana, Inc. 200 West Madison, Suite 3800 Chicago, Illinois 60606 Attn: John Kevin Poorman Phone: 312-750-8415 Fax: 312-750-8597 53 54 With further Latham & Watkins copy to: 5800 Sears Tower Chicago, Illinois 60606 Attn: Stephen S. Bowen Phone: 312-876-7652 Fax: 312-993-9767 To Agent: Lee Zinsli 482 SW Riverbend Drive West Linn, OR 97068 Phone: 503-656-2718 Fax: 503-653-8136 Notices shall be effective upon actual receipt or refusal of receipt whether sent by mail, overnight delivery, facsimile transmission or hand delivery, 12.02. Assignment. No party may assign, directly or indirectly, its rights or obligations hereunder without the prior written consent of the other parties. This Agreement shall be binding, upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns, including successors by operation of law pursuant to any merger, consolidation or sale of assets involving either party. 12.03. Sole Agreement. This Agreement may not be amended or modified in any respect whatsoever except by an instrument in writing signed by the parties hereto. This Agreement, the Other Required Documents, the Schedules and Exhibits hereto and the Confidentiality Agreements, constitute the entire agreement between the parties hereto with respect to the subject matter hereof and supersede all prior negotiations, discussions, writings and agreements between them. 12.O4. Captions. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 12.05. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon. 12.06. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties agree and acknowledge that delivery of a signature by facsimile shall constitute execution by such signatory. 12.07. Transactional Expenses. Except as otherwise provided herein, whether or not the transactions contemplated by this Agreement or the Other Required Agreements are consummated, each party shall pay its own fees and expenses incident to the negotiation, preparation, execution, delivery and performance hereof and thereof, including, without limitation, the fees and expenses 54 55 of its counsel, accountants and other experts. The Company shall pay all fees and expenses associated with (i) obtaining estoppel certificates, releases lease waivers, subordinations in connection with the transactions contemplated by this Agreement, (ii) obtaining all permits, consents, approvals, authorizations as are issued by, and making all such filings with, such third parties or Governmental Authorities as are required in connection with the transactions contemplated hereby, (iii) the investment banking services provided by Smith Barney, (iv) all other person or entities providing services to the Company, Meridian or the Partnership in connection with the preparation and negotiation of this Agreement and the consummation of the transactions contemplated hereby and (v) the costs incurred in defending and/or satisfying or settling any claims brought against the Company by Nova Partners with respect to or in connection with the placement of the BNP Loan (the "Nova Claim"), provided that if the Nova Claim is settled and paid prior to the Closing, the Partnership, and not the Company, shall bear $100,000 of the cost of such settlement. The Company shall pay the cost of the Title Policy Endorsements. 12.08. Knowledge Defined. To the extent that any of the representations and warranties contained in this Agreement are limited by the phrases "to the knowledge of" or "the Company has no knowledge of" or "Purchaser has no knowledge of" or words or phrases of similar import, the same shall mean, in the case of the Company, to the actual knowledge of Messrs. A.E. Brim, K. David McAllister, James M. Williams, Bruce A. Schoen, John Mook, Vern Reed, Craig J. Rhea or Rick D. McDaniel after due and diligent inquiry with respect thereto, which inquiry shall include inquiry of the on site administrator of the Facility, and, in the case of Purchaser, to the actual knowledge of Penny Pritzker or John Kevin Poorman, after due and diligent inquiry with respect thereto. 12.09. Severability. If any provision of this Agreement shall for any reason be held to be unlawfully broad as to any application, activity or subject, it shall be construed, by limiting and reducing it, to be enforceable to the extent compatible with applicable law. If, notwithstanding the preceding sentence, any provision contained in this Agreement shall, for any reason, be held to be illegal or unenforceable in any respect, such illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be reasonably construed as if the illegal or unenforceable provision had never been contained herein. 12.10. Further Assurances. The parties hereto shall use their commercially reasonable efforts to do and perform or cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments or documents as any other party may reasonably request in order to carry out the intent and purposes of this Agreement and the consummation of the transactions contemplated hereby. 12.11. Third Party Beneficiary. Nothing in this Agreement express or implied is intended to and shall not be construed to confer upon or create in any person not a party to this Agreement, any rights or remedies or obligations under or by reason of this Agreement, including without limitation, any right to enforce this Agreement, other than the rights granted to the Former Holders with respect to the Remaining Escrowed Funds. 55 56 12.12. Attorneys' Fees. In the event of a dispute between the parties hereto with respect to the interpretation or enforcement of the terms hereof, the prevailing party in any action resulting therefrom shall be entitled to collect from the other its reasonable costs and attorneys' fees, including its costs and fees on appeal. 12.13. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state or local statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean "including without limitation." 12.14. Schedules. The Company and Purchaser acknowledge that at the time of the execution of this Agreement the schedules referenced herein are not attached hereto. Accordingly, the effectiveness of this Agreement shall be subject to the Company and Purchaser approving such schedules by December 2, 1996 (or such later date as may be agreed upon by the Company and Purchaser) and that once approved (i) the Company's representations, warranties and covenants set forth in this Agreement shall be modified or amended in accordance with the terms thereof and (ii) the schedules may be not amended or modified by the Company without the prior approval of Purchaser. 12.15. Disclosure. Anything disclosed in this Agreement or in any of the Exhibits or Schedules attached to this Agreement or any other document delivered pursuant to this Agreement or in the Company Financial Statements or the Meridian Financial Statements shall be deemed to have been disclosed for any and all purposes to which said information relates, and to the extent that such information constitutes an exception to any of covenants, representations or warranties herein such covenants, representations or warranties shall not be deemed to have been breached if such information as and where disclosed is reasonably adequate to give the non-disclosing party adequate notice of the exception to the applicable covenants, representations or warranties. 12.16. Expense Reimbursement. On or prior to January 15, 1997, the Purchaser shall cause the Partnership to provide the Agent with an accounting of the amount of the Reimbursable Marketing Expenses and the Reimbursable Pre-Opening Expenses. Within five (5) business days thereafter, the Purchaser shall pay to the Agent, for distribution to the Former Holders, the positive difference, if any, between (i) the sum of the Reimbursable Marketing Expenses and the Reimbursable Pre-Opening Expenses and (ii) $400,000. 56 57 IN WITNESS WHEREOF, the parties hereby executes this Agreement as of the day and year first set forth therein. BRIM, INC. By: /s/ James Wile ------------------------ Its: Sr. Vice President ------------------------ CC-LANTANA, INC. By: ------------------------ Its: ------------------------ 57 58 AGENT'S ACKNOWLEDGMENT The Agent hereby executes this Agreement subject to the approval of the shareholders of the Company and, in the event such approval is given, solely for the purpose of agreeing to act as the agent of such shareholders for the limited purposes set forth herein. Subject to obtaining such shareholder approval, Agent hereby represents and warrants that this Agreement has been duly and validly executed and delivered by the Agent and constitutes a legal, valid and binding obligation of the Agent and is enforceable against the Agent in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (regardless of whether such enforceability is considered in a proceeding in equity or at law). Agent acknowledges and agrees to the rights of the Purchaser with respect to the interest earned on the Escrow Account as provided in Section 11.09 hereof. /s/ Lee Zinski ---------------------------- Lee Zinski 58 59 ANNEX A TO LEASE AGREEMENT THIS ANNEX A TO LEASE AGREEMENT ("Annex A"), dated as of June 30, 1997, between The Board of Trustees of Needles Desert Communities Hospital, duly appointed by the Mayor of the City of Needles, California pursuant to Section 37603 of Title 4, Division 3, Part 2, Chapter 5, Article 7 of the Government Code of the State of California ("Lessor"), and Principal-Needles, Inc. ("Lessee"), a Tennessee corporation. WITNESSETH: WHEREAS, Lessor is engaged in the provision of health care services in Needles, California through the operation of Needles Desert Communities Hospital, a 53-bed general acute care hospital (the "Hospital"); and WHEREAS, Lessee is experienced in the business of operating, managing and maintaining health care facilities, including, without limitation, providing or arranging for health care services to be conducted through such facilities; and WHEREAS, Lessor after due consideration and with the approval and consent of the City Council of the City of Needles, California (the "City Council"), is of the opinion that the lease of the Premises and the Equipment (as those terms are defined in the Lease Agreement ("Lease") to which this Annex A is attached) to Lessee is in the community's best interest in light of significant changes in the health care industry; and WHEREAS, the parties hereto have contemporaneously herewith entered into the Lease. NOW, THEREFORE, for and in consideration of the foregoing premises and the agreements, covenants, representations and warranties hereinafter set forth and other good and valuable consideration, the receipt and adequacy of all of which are acknowledged and agreed, the parties hereto agree as follows: 1. Exclusive Right to Operate the Hospital and Certain Related Matters. 1.1 Exclusive Right to Operate Hospital. Lessor hereby grants to Lessee, effective as of the Closing (as defined in Section 2.1), the exclusive right to operate, for its own account and benefit, the Hospital and the business conducted through the Hospital during the term of the Lease. Except as otherwise specifically provided herein and in the Lease, such exclusive right shall encompass all aspects of the Hospital and the business conducted through the Hospital, including, without limiting the generality of the foregoing, exclusive control over matters of all kind relating to professional, medical, administrative, financial and technical services, personnel, marketing, contracting, leasing, case management, equipment, inventory and supplies (collectively, the "Business"). 60 1.2 License to Control and Use Certain Assets. In order to facilitate Lessee's operation of the Hospital and the Business, Lessor hereby grants to Lessee, effective as of the Closing, an exclusive irrevocable license to exercise exclusive control over, and to exclusively use in Lessee's own name or for Lessee's own account, any and all of the following assets of Lessor during the term of the Lease solely for the purpose of carrying out Lessee's duties and responsibilities herein and under the Lease: (a) to the extent assignable or transferable under applicable law, all licenses, certificates of need, certificates of exemption, franchises, accreditations and registrations and other licenses or permits issued in connection with the Business (the "Licenses"), including, without limitation, the Licenses described in Schedule 1.2(a); (b) all documents, records, operating manuals and files owned by Lessor or its affiliates, pertaining to or used in connection with the Business, including, without limitation, all patient records, medical records, financial records, equipment records, construction plans and specifications, but excluding Lessor's minute books and other City records; (c) the name "Needles Desert Communities Hospital" and legally permissible variations thereof; and (d) the benefit of all goodwill associated with the foregoing. 1.3 Sale of Certain Assets. At the Closing, Lessor shall sell, transfer, convey, assign and deliver to the Lessee (or its designee), and Lessee shall purchase from Lessor, the following assets: (a) all of Lessor's interest, to the extent assignable or transferable by it under applicable law, in and to those contracts and agreements relating to the Business set forth in Schedule 1.3(a) (the "Contracts"); (b) the deposits, escrows, prepaid taxes or other advance payments relating to any expenses of the Business identified in Schedule 1.3(b) (the "Prepaid Expenses"); (c) to the extent useable and not obsolete, all inventories of supplies, drugs, food, janitorial and office supplies and other disposables and consumables existing on the Closing Date (as defined in Section 2.1) and located at the Hospital (the "Operating Inventory"); and (d) that certain trade credit from Toshiba in the approximate amount of $97,000 towards the purchase of equipment having a value in excess of $253,000. 2 61 The items referred to in Sections 1.2 and 1.3 are hereafter referred to, collectively, as the "Assets". 1.4 Excluded Assets. The following items which are related to the Assets are not intended by the parties to be covered by the license granted under Section 1.2 or the sale and transfer under Section 1.3 and are excluded from the Assets (collectively, the "Excluded Assets"): (i) all cash and cash equivalents; (ii) short-term investments; (iii) patient accounts receivable, including without limitation patient accounts receivable from Medicare, Medicaid or Champus ("Agency Receivables"); (iv) notes and accounts receivable from affiliates and others; (v) prepaid expenses not listed on Schedule 1.3(b), and (vi) any other assets of Lessor related to the Hospital or the Business, or otherwise, not specifically referred to in Section 1 hereof. Notwithstanding the foregoing, Lessee shall use commercially reasonable efforts (but shall not be required to initiate any collection proceedings) to collect all patient accounts receivable of Lessor existing as of the date of Closing on behalf of Lessor, and upon receipt thereof, shall deposit the same in a bank account designated by Lessor. On or before the tenth day of each month Lessee shall provide Lessor with a written summary report of the accounts receivable collected during the preceding month. On or before the fifteenth (15th) day of each month, Lessor shall pay Lessee a) a service fee in the amount of fifteen percent (15%) of the amount of accounts receivable collected by Lessee during the preceding month, and b) until repaid, twenty-five percent (25%) of the original principal amount of the operating loan made by Lessee to Lessor pursuant to Section 11.23, below, together with accrued interest thereon at the variable rate of the Prime Rate as reported from time to time in the Money Rates section of the Wall Street Journal. 1.5 Net Earnings; Expenses and Losses. Lessor acknowledges that from and after the Closing, Lessee will operate the Hospital and the Business for its sole and exclusive account and benefit, and accordingly shall be entitled to retain all profits and benefits derived therefrom. Lessee shall pay all expenses and costs, of every kind and description, associated with its operation of the Hospital and the Business. In the event the Hospital and the Business is operating at a loss at any time during the term of the Lease, Lessee shall not be entitled to any payment, in kind or otherwise, from Lessor or the City Council, and Lessee shall be solely responsible for covering any such loss. 1.6 Assignment and Assumption; Assets Free and Clear. (a) Notwithstanding any other provision hereof to the contrary, all Assets to be assigned and transferred to Lessee shall on the Closing Date, be free and clear of all liabilities, liens and encumbrances, except for the liens, liabilities and encumbrances expressly agreed to be assumed by Lessee pursuant to the Assignment and Assumption Agreement (the "Assumption Agreement") substantially in the form attached hereto as Appendix 1.6(a). Except as provided in the Assumption Agreement, Lessee is not assuming and shall not be deemed to have assumed any other liability or obligation of Lessor or any of its affiliates, fixed or contingent, disclosed or undisclosed, or otherwise. 3 62 (b) To effect assignments and assumptions of Contracts contemplated hereby and the Scheduled Leases (as that term is defined in Section 4.6) which Lessee agrees to assume (the "Leases"), Lessee and Lessor shall execute the Assumption Agreement. Except for those Contracts and Leases of Lessor expressly assumed by Lessee in the Assumption Agreement, Lessee is not undertaking and shall not be deemed to be responsible for any other of Lessor's leases, agreements or contracts or for any indebtedness incurred or arising with respect to any period on or prior to the Closing Date in connection with the Assets or their operation, whether fixed or contingent, disclosed or undisclosed, or otherwise. (c) If, in the Assumption Agreement, Lessee assumes any liabilities of Lessor and if there are, or are alleged to be, any liabilities of Lessor related to those so assumed by Lessee as of the date immediately preceding the Closing Date in excess of the amount of such liabilities so assumed, Lessee shall not be required hereunder to assume or pay such items, but instead shall promptly deliver such items to Lessor for payment, contest, compromise or settlement as Lessor may determine. The amount of any liability assumed by Lessee shall be determined in accordance with Section 1.7. (d) With respect to any indebtedness secured by a lien on the Assets which is not expressly assumed by Lessee in the Assumption Agreement, Lessor shall discharge any such lien prior to or at the Closing. 1.7 Purchase of Prepaid Expenses and Operating Inventory. (a) The purchase price of the Prepaid Expenses and the Operating Inventory shall be the sum of the values determined in accordance with Section 1.7(b) and Section 1.7(c) (the "Purchase Price"). (b) The value of the Prepaid Expenses shall be initially determined based on the Interim Balance Sheet (as hereinafter defined), and shall be subject to adjustment as provided in Section 1.8. Should any dispute arise concerning such inventory, such dispute shall be referred to the Accountants (as defined in Section 1.8) whose determination in respect of such dispute shall be final. (c) The value of the Operating Inventory shall be determined by a physical inventory of such items to be conducted jointly by Lessor and Lessee preceding the Closing Date or on such other day as mutually agreed upon by Lessee and Lessor. Such inventory shall be conducted in accordance with Lessor's prior practices, policies and procedures, and shall be subject to adjustment as provided in Section 1.8. Should any dispute arise concerning such inventory, such dispute shall be referred to the Accountants (as defined in Section 1.8) whose determination in respect of such dispute shall be final. 4 63 (d) As of the Closing, Lessee and Lessor shall prorate, if possible, property lease payments, property taxes and other assessments, as well as all other income and expenses with respect to the Business which are normally prorated upon the sale of assets of a going concern. Lessor shall, to the extent practicable, order final readings of all power and other utility charges to be made as of the Closing Date and shall pay when due all charges in respect thereof. Lessee shall allow all employees of Lessor who accept employment with Lessee to carry forward any paid time off accrued within the twelve (12) months immediately preceding the Closing Date with no reduction in the Purchase Price. Lessor shall be responsible for any other accrued paid time off of its employees. In addition, should any of Lessor's employees elect to "cash-out" rather than carry forward any of their paid time off which accrued within the twelve (12) months immediately preceding the Closing Date, Lessor shall be responsible for the payment thereof. 1.8 Adjustments to Purchase Price. (a) For purposes of determining adjustments to the Purchase Price on the Closing Date and the amount of cash to be delivered at the Closing in accordance with Section 1.7 hereof, such adjustments shall be made initially on or prior to the Closing Date using Lessor's latest regularly prepared unaudited balance sheet in respect of the Business (the "Interim Balance Sheet"). The Interim Balance Sheet shall be as of a date not more than forty-five (45) days prior to the Closing. Such initial calculations shall be set forth on a schedule delivered by Lessor to Lessee with a copy of the Interim Balance Sheet not less than three (3) days prior to the Closing. (b) Within one hundred twenty (120) days after the Closing Date (or as soon thereafter as possible), the parties shall make final adjustments to the Purchase Price as contemplated by Section 1.7 (the "Post Closing Adjustments"). Lessor shall use its reasonable best efforts, and Lessee shall fully cooperate with Lessor in such efforts, to prepare and deliver to Lessee not later than ninety (90) days after Closing an audited balance sheet of Lessor with respect to the Business as of the close of business on the Closing Date (the "Closing Balance Sheet"). The Closing Balance Sheet will be used to determine any Post Closing Adjustments and shall be prepared in accordance with generally accepted accounting principles applied on a basis consistent with the presentation of the June 30, 1996 balance sheet. (c) Lessor shall deliver a schedule to Lessee detailing any Post Closing Adjustments and detailing the differences between the Purchase Price, as adjusted, and the amount paid as the Purchase Price on the Closing Date. Such schedule shall be delivered to Lessee with a copy of the Closing Balance Sheet. 5 64 (d) Should Lessee dispute the Post Closing Adjustments proposed by Lessor, Lessee shall promptly (and in no event later than fifteen (15) days after receipt of the Closing Balance Sheet and the required schedule of Post Closing Adjustments) deliver a schedule to Lessor detailing each disputed Post Closing Adjustment and its proposed Post Closing Adjustments. If after thirty (30) days after delivery of the Closing Balance Sheet, Lessee and Lessor are unable to agree upon the amount of the Post Closing Adjustments, Lessor and Lessee shall submit the matter to arbitration to be determined by an accounting firm mutually acceptable to them. If Lessor and Lessee are unable to agree on the choice of the accounting firm, they will select a nationally recognized accounting firm (the "Accountants") by lot, excluding their respective regular independent accounting firms. The Accountants shall review the proposed Post Closing Adjustments and determine the amount thereof, such determination to be made as soon as practicable. In making such review and determination, the Accountants shall utilize the terms and provisions of this Annex A, together with generally accepted accounting policies and procedures applied on a basis consistent with those utilized by Lessor in preparing Lessor's audited financial statements as of June 30, 1996. The decision of the Accountants shall be binding on both Lessor and Lessee. Each of Lessee and Lessor shall pay one-half the expenses of engagement of the Accountants in respect of such review and the resolution of any dispute concerning the Operating Inventory and Post-Closing Adjustments. (e) Within twenty (20) days of Lessee's receipt of the Closing Balance Sheet and the required schedule of Post Closing Adjustments (or, if Lessee disputes the Post Closing Adjustments, within ten (10) days of the resolution or determination of the adjustments in accordance with Section 1.8(d) above), either (i) Lessee shall be entitled to receive from the Lessor the amount by which the Purchase Price paid on the Closing Date exceeds the Purchase Price, as adjusted, and Lessor shall pay Lessee in cash or in other immediately available funds such additional amounts as may be needed to cover the amount due Lessee, or, if such amount is $75,500 or less, at Lessor's option, allow Lessee to offset such amount against the next quarterly payment of Additional Rent (as defined in the Lease); or (ii) Lessee shall pay Lessor in cash or other immediately available funds the amount by which the Purchase Price paid on the Closing Date is less than the Purchase Price, as adjusted. 1.9 Other Calculations. All accounts payable for Operating Inventory ordered by Lessor in a manner prohibited by Section 6.3 hereof shall be retained by Lessor and not purchased by Lessee, unless Lessee shall otherwise agree. Additionally, before the Closing Date, Lessor shall calculate, as of the Closing, the salary and other pay owed to its employees who are employed in connection with the Business and whose employment by Lessor will terminate as of the Closing, and Lessor shall distribute such amounts to such employees promptly following the Closing. 6 65 1.10 Cessation of Lessor's Operation. Effective as of the Closing, Lessor shall cease its operation of the Hospital and the Business. Such cessation shall include, without limitation, closing the books and accounts, termination of all employees and payment of all amounts due to such terminated employees as contemplated herein, and taking all other actions specified herein and in the Lease and otherwise necessary to facilitate the transactions contemplated herein and in the Lease. 1.11 Procedure with Respect to Patients in the Hospital at Closing. To compensate Lessor for services rendered and medicine, drugs and supplies provided by Lessor before the date hereof (the "Lessor Transition Services") to patients admitted to the Hospital on or before the Closing Date but discharged on or after the Closing Date (such patients being referred to herein as the "Transition Patients"), the parties shall take the following actions: (a) As soon as practicable after the Closing Date, Lessor shall deliver to Lessee a statement itemizing the Lessor Transition Services provided by Lessor prior to the Closing Date to those Transition Patients for which reimbursement is made on a DRG (or similar "fixed price") basis ("DRG Transition Patients"). Lessee shall pay to Lessor an amount equal to: (x) the total DRG and outlier payments including capital (before deposit and deductible/copayments per the remittance advice) actually received by Lessee on behalf of a particular DRG Transition Patient, multiplied by a fraction, the numerator of which shall be the total patient days related to the Lessor Transition Services provided to the DRG Transition Patient, and the denominator of which shall be the sum of (1) the total patient days related to the Lessor Transition Services provided to the DRG Transition Patient and (2) the total patient days related to services rendered and medicine, drugs and supplies provided by Lessee on or after the date hereof (the "Lessee Transition Services") to such DRG Transition Patient, minus (y) the amount of deposits and deductibles/copayments per the remittance advice. Such payment shall be made to Lessor within ten (10) days after Lessee's receipt of such DRG or outlier payments, accompanied by copies of remittances and other supporting documentation as reasonably required by Lessor. (b) With respect to those Transition Patients for which Government Program Reimbursement is made on a cost basis (the "Medicare Straddle Patients"), Lessee shall pay to Lessor within ten (10) days after Lessee's receipt of such payment an amount equal to: 7 66 (x) the amount of cost-based reimbursement actually received by Lessee for a particular Medicare/Medi-Cal Straddle Patient on or after the date hereof multiplied by a fraction, the numerator of which shall be the total number of days prior to the date hereof on which Lessor provided Lessor Transition Services to the Medicare/Medi-Cal Straddle Patient, and the denominator of which shall be the total number of days of the Medicare/Medi-Cal Straddle Patient's stay at the Hospital; minus (y) the amount of deposits and deductibles/copayments per the remittance advice. (c) As of the Closing Date, Lessor shall prepare cut-off billings for all patients not covered by Section 1.11(a) or Section 1.11(b) (the "Straddle Patients"). Lessor shall be responsible for billing and collecting all amounts due Lessor from Straddle Patients. (d) If Lessee receives any amounts from the Medicare program for periodic interim payments or costs paid for on a pass through basis (such as capital costs) associated with the operation of the Hospital and relating to periods prior to the Closing Date, the Lessee shall promptly tender the amount applicable to the period prior to the Closing Date to Lessor. If Lessor receives any amounts from the Medicare program for periodic interim payments or pass through costs (such as capital costs) associated with the operation of the Hospital relating to periods subsequent to the Closing Date, Lessor shall promptly tender same to Lessee. Lessee or Lessor shall receive periodic interim payments and pass through costs payments (including capital costs) applicable to the period of time owned by such party. (e) If Lessee receives after Closing any deductibles/copayments due Lessor from DRG Transition Patients, Lessee shall remit within ten (10) days the full amount thereof to Lessor. If either party receives any amount from any Government Reimbursement Program for cost-based patients which relate to services rendered by the other party, the party receiving such amount shall remit within ten (10) days the full amount thereof to the other party. (f) In the event that Lessee and Lessor are unable to agree on the amount to be paid to Lessor under Section 1.11(a), (b), (c) or (d) above, then such amount shall be determined by an accounting firm mutually acceptable to Lessee and Lessor at their joint expense. 1.12 Excluded Liabilities. Except as expressly provided to the contrary under Section 5.4, Section 7.7 or elsewhere herein, under no circumstance shall Lessee be obligated to pay or assume, and none of the Assets shall be or become liable for or subject 8 67 to, any liability of Lessor, including, without limitation, the following, whether fixed or contingent, recorded or unrecorded (collectively, the "Excluded Liabilities"): (a) indebtedness and other obligations or guarantees of Lessor of any kind or nature, other than those specifically assumed by Lessee pursuant to this Annex A; (b) liabilities or obligations of Lessor in respect of periods prior to and including Closing arising under the terms of the Medicare, Medicaid, Blue Cross or other third party payor programs, and any liability arising pursuant to the Medicare, Medicaid, Blue Cross or any other third party payor program as a result of the consummation of the transactions contemplated herein, including, without limitation, recapture; (c) federal, state or local tax liabilities or obligations of Lessor in respect of periods prior to Closing or resulting from the consummation of the transactions contemplated herein, including, without limitation, any income tax, any franchise tax, any tax recapture, any sales and/or use tax, any indigent care tax, any state and local recording fees and taxes which may arise upon the consummation of the transactions contemplated herein and, subject to the provisions of Section 8.5 hereof, any FICA, FUTA, workers' compensation taxes and any and all other taxes or amounts due and payable as a result of the exercise by any employees of Lessor (who are not hired by Lessee or who elect prior to or as of Closing not to become employees of Lessee subsequent to Closing) of such employees' rights to vacation, sick leave and holiday benefits accrued while in the employ of Lessor; (d) liability for any and all claims by or on behalf of Lessor's employees relating to periods prior to Closing, including, without limitation, liability for all employee benefits whether or not covered by the Employee Retirement Income Security Act of 1974, as amended, including without limitation, any pension, profit sharing, deferred compensation, or any other employee health and welfare benefit plans, liability for any EEOC claim, wage and hour claim, unemployment compensation claim or workers' compensation claim, and liability for all employee wages and benefits, including, without limitation, accrued vacation, sick leave, holiday pay, severance pay (except as otherwise agreed in writing by Lessor and Lessee), and related taxes or other liability related thereto in respect Lessor's employees; (e) liability arising out of or in connection with any employee benefit plan or arrangement contributed to by Lessor or any affiliate of Lessor; (f) liabilities or obligations arising as a result of any breach by any Lessor at any time of any contract or commitment that is not assumed by Lessee; 9 68 (g) liabilities or obligations arising out of any breach by Lessor prior to Closing of any Contract; (h) any obligation or liability attributable to periods prior to or as of Closing and asserted under the federal Hill-Burton program or other restricted grant and loan programs with respect to the ownership or operation of the Assets; (i) any liability arising out of or in connection with claims for alleged acts or omissions relating to the ownership or operation of the Hospital, the Business, or the Assets that occurred prior to Closing; (j) contracts and agreements between any Lessor and one or more of Lessor's affiliates; (k) any debt, obligation, expense or liability of the Lessor arising out of or incurred solely as a result of any transaction of Lessor occurring after Closing or for any violation by Lessor of any law, regulation or ordinance at any time; (l) liability arising out of the assignment at Closing of any Contract, except for those Contracts for which the Lessor has obtained appropriate consents to the assignment or notified Lessee that required consents have not been obtained and Lessee has accepted the assignment; (m) any accounts payable attributable to legal and accounting fees and similar costs incurred by Lessor that are directly related to the sale of any of the assets of Lessor; (n) any other current payable that has not been historically accounted for by the Lessor as an "Account Payable", including any payable related to compensation or fringe benefits for Lessor's employees; (o) any Medicare "recapture" which may be payable by Lessor in connection with the transactions contemplated by the Lease and this Annex A; and (p) any consents or other documents required by any leasehold mortgagee providing financing to Lessee in connection with this transaction to be executed and delivered by Lessor. 2. Closing. 2.1 Closing. The consummation of all matters contemplated herein (the "Closing") shall take place in Needles, California at the offices of Lessor or other agreed upon location, at 10:00 A.M. local time on the last day of the month in which all required 10 69 regulatory and other approvals to the Closing have been obtained, but in no event later than August 31, 1997 unless the parties hereto agree otherwise in writing (the "Closing Date"). 2.2 Action of Lessor at Closing. At the Closing, Lessor shall deliver to Lessee the following: (i) the Assumption Agreement; (ii) a general bill of sale and assignment substantially in the form attached hereto as Appendix 2.2(ii) (the "Bill of Sale") conveying and assigning to Lessee all of the Assets described in Section 1.3; (iii) copies of resolutions duly adopted by Lessor and resolutions duly adopted by the City Council authorizing and approving Lessor's performance of the transactions contemplated hereby and the execution and delivery of the documents described herein, certified as true and of full force as of Closing by appropriate officers of Lessor; (iv) certificates, dated as of the Closing Date, of officers of Lessor certifying that as of the Closing all of the representations and warranties by or on behalf of Lessor contained in this Annex A are true and correct and all covenants and agreements of Lessor to be performed prior to or as of the Closing pursuant to this Annex A have been performed; (v) certificates of incumbency, dated as of the Closing Date, for the officers of Lessor making certifications for Closing or executing the Assumption Agreement or this Annex A; (vi) subject to Section 1.4 hereof, all of Lessor's Contracts, Leases, commitments, books, records and other data relating to the Hospital, the Business and the Assets, and simultaneously with such delivery will take all such steps as may reasonably be required to put Lessee in actual operating control of the Hospital, the Business and the Assets; and (vii) such other documents as may be reasonably requested by Lessee. 2.3 Action of Lessee at Closing. At the Closing, Lessee shall deliver to Lessor the following: (i) payment of the Purchase Price in cash or immediately available funds; (ii) the Assumption Agreement; 11 70 (iii) copies of corporate resolutions duly adopted by Lessee authorizing and approving Lessee's performance of the transactions contemplated hereby and the execution and delivery of the documents described herein, certified as true and of full force as of Closing by appropriate officers of the Lessee; (iv) a certificate, dated as of the Closing Date, of an officer of Lessee certifying that as of the Closing all of the representations and warranties by or on behalf of Lessee contained in this Annex A are true and correct and the covenants and agreements of Lessee to be performed prior to or as of Closing pursuant to this Annex A have been performed; (v) a certificate of incumbency, dated as of the Closing Date, for the officers of Lessee making certifications for Closing or executing the Assumption Agreement or this Annex A; (vi) a certificate of qualification to do business of Lessee from the State of California, dated the most recent practical date prior to Closing; (vii) evidence of the purchase by Lessor of the tail insurance provided for under Section 7.9 hereof; and (viii) such other documents as may be reasonably requested by Lessor. 3. Operation of Hospital by Lessee. 3.1 General Description. Except as otherwise provided herein and in the Lease, Lessee shall, at its sole cost and expense and for its own account and benefit, provide the services it deems necessary and appropriate for the operation of the Hospital and the Business. Without limiting the generality of the foregoing, Lessee shall have full and complete authority and discretion (i) in the management, supervision, direction and overall operation of the Hospital and the Business for the purposes stated herein, (ii) as to all policy matters and other decisions affecting such operation, management and maintenance of the Hospital and Business, (iii) in the day-to-day business, operations and affairs of the Hospital and the Business, and (iv) in planning and coordinating the strategic operational direction of the Hospital and the Business. In all events, Lessee's operation of the Hospital and the Business shall not cause the Hospital to lose its accreditation as a general hospital by JCAHO, and all duties and responsibilities herein and in the Lease to be performed by Lessee shall be performed in compliance with all Legal Requirements, including without limitation the provisions of Sections 37609.1 and 37615.4 of the Government Code of the State of California. 3.2 Employees. Lessee shall, at is sole cost and expense, and for its own account and benefit, recruit, employ, train, supervise, promote and/or terminate all personnel it deems necessary for its operation of the Hospital and the Business. Lessee shall use its best efforts to employ substantially all of the personnel employed at the Hospital immediately 12 71 prior to the Closing who wish to continue their employment at the Hospital after the Closing. Notwithstanding the foregoing, Lessee does not commit to or guarantee the continued employment of any individual, or to the maintenance of certain staffing levels except as set forth in Section 3.11. From and after closing Lessee shall be solely responsible for all matters associated with such personnel, including, without limitation, payment, in kind or otherwise, of compensation and benefits, payroll and other taxes imposed by federal, state and local Legal Requirements (as that term is defined in the Lease), setting of guidelines for raises, promotions, discipline and/or termination during the term of the Lease. 3.3 Billings and Collection. Lessee shall be solely responsible for all billing and collection activities necessary and required for its operation of the Hospital and the Business. Lessee, in its sole discretion, shall establish records, accounts and practicing guidelines, including, without limitation, setoffs for its own purposes from the accounts, the placement of accounts for collection, settlement and compromise of claims and institution of legal action for recovery of accounts, for such billing and collection activities. 3.4 Payor Contracts. Lessee will use reasonable efforts to obtain and maintain payor contracts which are most advantageous to the Hospital for the purpose of maximizing revenues. 3.5 Maintenance of Core Services. During the term of this Lease, Lessee shall provide and be responsible for those basic services required by the State of California from time to time for licensure as a general acute care hospital, which basic services currently include medical, nursing, surgical, anesthesia, laboratory, radiology, pharmacy and dietary services. 3.6 Hospital Board. During the term of the Lease, Lessee shall maintain a seven (7) member hospital operating board ("Hospital Board") consisting of three (3) members appointed by Lessor, one (1) member appointed by Lessee from among a list of a least five (5) residents of the Needles, California community selected by Lessor, two (2) members comprised of physicians on the active medical staff of the Hospital selected by Lessee, and one (1) member selected by Lessee. The Hospital Board shall be governed by Bylaws substantially in the form attached hereto as Appendix 3.6, and shall (a) assist in the development of and monitor reasonably necessary quality review and utilization management programs relating to medical and non-medical professional and technical staffs and patient care units; (b) monitor and evaluate activities required by JCAHO, JCAHO Accreditation Standards and by other applicable law; (c) evaluate practitioner performance through valid and reliable measurement systems based when appropriate on objective, clinically-sound criteria; (d) monitor clinical aspects of providing quality health care; (f) assist in the development and adoption of criteria, policies, and procedures regarding appointment, reappointment and alteration of medical staff status, granting clinical privileges, disciplinary action and other matters referred by the medical staff boards; and (h) assist in the development of reporting mechanisms so that pertinent findings and recommendations from the foregoing activities are shared with the medical staff. Any policies, procedures, guidelines and directives adopted by the Hospital Board shall be consistent with the foregoing responsibility. Lessee shall keep the Hospital Board informed of matters relating to the operation of the Hospital, including without limitation providing the Hospital Board with 13 72 copies of its capital budgets, strategic plans, licensing and accreditation surveys, reviews and reports, and summaries of its purchases of furniture, fixtures and equipment and the costs of any leasehold improvements. 3.7 Financial Records; Tax Returns. Lessee shall maintain its own books and records for the Hospital and the Business in accordance with generally accepted accounting principles consistently applied during the term of the Lease from which audited financial statements shall be prepared for each fiscal year during the term of the Lease. Lessee shall prepare and timely file all tax returns required to be filed. 3.8 Licenses; Permits; Insurance. Lessee shall obtain and maintain all licenses, permits, other certificates and insurance necessary and required to operate, manage and maintain the Hospital and the Business, in compliance with all applicable Legal Requirements, as contemplated herein during the term of the Lease. Lessor shall cooperate with Lessee in causing all such licenses now issued in Lessor's name to be issued or reissued in Lessee's name. 3.9 Certain Health Care Services Matters. Lessee's participation in health care services arrangements, such as Blue Cross, Medicare, Medicaid and CHAMPUS, during the term of the Lease shall be in compliance with the terms and conditions of such arrangements and shall not cause the Hospital to lose its qualification for participation therein. 3.10 Indigent Care. During the term of this Lease, Lessee shall provide care to indigent residents of the Needles, California community at a level and in accordance with the Indigent Care Policy, a copy of which is attached as Appendix 3.11. Lessee's obligation pursuant to this Section 3.10 shall be subject to change as appropriate in the discretion of Lessee in the event of changes in governmental policy regarding the treatment of indigent patients and payment policies relating to uninsured and underinsured patients. 3.11 Staffing Levels. Lessee will apply national staffing standards to hospital staffing plans, allowing patient volume to guide final staffing decisions. Notwithstanding the foregoing, Lessor acknowledges that staff-to-patient ratios and similar quantitative measures are not necessarily determinative of the quality of patient care, and Lessee is not, by virtue of this provision, guaranteeing to Lessor the maintenance of any set staffing levels. 4. Representations and Warranties of Lessor. As of the date hereof, Lessor represents and warrants to Lessee that: 4.1 Capacity. Lessor has been duly appointed by the Mayor of the City of Needles, California pursuant to Section 37603 of Title 4, Division 3, Part 2, Chapter 5, Article 7 of the Government Code of the State of California and has all requisite power and authority to operate and lease its properties and to carry on its businesses as now being conducted. 14 73 4.2 Powers; Absence of Conflicts With Other Agreements, etc. (a) The execution, delivery and performance by Lessor of the Lease and this Annex A and the other agreements and transactions contemplated hereby: (i) are within the power of Lessor, are not in contravention of the terms of the any resolution or act or governing instrument or any amendments thereto of Lessor and have been duly authorized by the City Council as and to the extent required; and (ii) on the Closing Date, (A) will not result in any breach of any indenture, agreement, lease or instrument to which Lessor is a party or by which Lessor is bound, (B) will not constitute a violation of any judgment, decree, or order of any court of competent jurisdiction applicable to Lessor, (C) will not violate any law, rule or regulation of any governmental authority applicable to Lessor or any of the Assets and (D) will not require any consent, approval or authorization of, or notice to, or declaration, filing or registration with, any governmental or regulatory authority. (b) As of the Closing, this Annex A and the other agreements and instruments contemplated hereby have been duly and validly executed and delivered by Lessor. This Annex A and the other agreements and instruments contemplated hereby constitute the valid, legal and binding obligations of Lessor enforceable against it in accordance with their terms except as such may be limited by bankruptcy and other laws of general applicability affecting sellers' and creditors' rights and general equitable principles. 4.3 Financial Statements. Schedule 4.3 hereto consists of true, correct and complete copies of Lessor's audited financial statements for the year ended June 30, 1996 (collectively, the "Financial Statements"). The Financial Statements have been prepared from and are in accordance with the reconstructed books and records of Lessor, and, as such, are true, complete and accurate, and fairly present the financial position of Lessor as of the dates and for the periods indicated, in each case in accordance with generally accepted accounting principles consistently applied ("GAAP"), during such periods. Any financial statements of Lessor prepared as of a date after June 30, 1996 and delivered to Lessee previously or pursuant to this Annex A have been or shall be subject to and prepared in accordance with the preceding representation and the standards set forth therein. 4.4 Licenses. Lessor has all licenses and permits relating to the ownership of the Assets and operation of the Business as are necessary and required for such ownership and operation. Schedule 4.4 hereto contains a complete description of all material licenses, permits, franchises, certificates of need, certificate of need applications, and PRO memos, if any, and their respective dates of termination or renewal, owned or held by Lessor relating to the ownership, development or operation of the Assets or the Business, together with 15 74 any formal and specific notices or directives received from the agency responsible for such Schedule 4.4 item, for which noncompliance with such notice or directive would likely cause the revocation, suspension or material diminution in term for such item. All items listed on Schedule 4.4 are, to the best of Lessor's knowledge and belief, in good standing and, except as expressly set forth on Schedule 4.4, are not subject to renewal within less than one (1) year. 4.5 Certain Contracts. Schedule 4.5 lists all contracts to which Lessor is a party involving obligations of Lessor in respect of the Business (the "Scheduled Contracts"). Lessor has delivered to Lessee true and correct copies of all Scheduled Contracts. All of such Contracts which Lessee has agreed to assume pursuant to the Assumption Agreement are valid and binding obligations of Lessor, are in full force and effect, and are enforceable against Lessor in accordance with their terms except as such may be limited by bankruptcy and other laws of general applicability affecting sellers' and creditors' rights and general equitable principles. Except as expressly noted in Schedule 4.5, all Contracts which Lessee has agreed to assume pursuant to the Assumption Agreement are terminable at the option of Lessor on no more than ninety (90) days notice without liability to Lessor. Lessor has not received any notice that the other parties to the Contracts which Lessee has agreed to assume pursuant to the Assumption Agreement are (i) in default under such Contracts or (ii) consider Lessor to be in default thereunder. Except as expressly noted in Schedule 4.5, to the best knowledge of Lessor, no party to any of the Contracts which Lessee has agreed to assume pursuant to the Assumption Agreement intends to terminate or materially adversely modify its agreement(s) with respect thereto, or materially adversely change the volume of business done thereunder. 4.6 Certain Leases. Schedule 4.6 lists all leases to which Lessor is a party in respect of the Business ("Scheduled Leases"). Lessor has delivered to Lessee true and correct copies of all Scheduled Leases and all related amendments, supplements, modifications and related documents (the "Scheduled Lease Documents"). Except as set forth in Schedule 4.6, the Scheduled Lease Documents are unmodified and in full force and effect, and there are no other agreements, written or oral, between Lessor and any third parties claiming an interest in Lessor's interest in the Scheduled Leases or otherwise relating to Lessor's use and occupancy of any leased property. All such Scheduled Leases which Lessee has agreed to assume pursuant to the Assumption Agreement are valid and binding obligations of Lessor, are in full force and effect, and are enforceable against Lessor in accordance with their terms except as such may be limited by bankruptcy and other laws of general applicability affecting sellers' and creditors' rights and general equitable principles; and no event has occurred including, but not limited to, the execution, delivery and performance of this Annex A and the consummation of the transactions contemplated hereby which (whether with or without notice, lapse of time or both) would constitute a default thereunder. Lessor has not received any notice that the other parties to the Scheduled Leases which Lessee has agreed to assume pursuant to the Assumption Agreement are (i) in default under such Leases or (ii) consider Lessor to be in default thereunder. No property leased under any Scheduled Lease which Lessee has agreed to assume pursuant to the Assumption Agreement is, excepted for the Permitted Encumbrances, subject to any lien, encumbrance, easement, right of way, building or use restriction, exception, variance, reservation or limitation as might in any respect interfere with or impair the present and continued use thereof in the usual and normal conduct of the Business. 16 75 4.7 Title to Assets and Related Matters. On the Closing Date, Lessor will hold of record good, marketable and insurable title to all of the Assets free and clear of all title defects, liens, pledges, claims, charges, rights of first refusal, security interests or other encumbrances and not subject to any rights of way, building or use restrictions, exceptions, variances, reservations or limitations of any nature whatsoever, except with respect to all such properties, (i) matters set forth in Schedule 4.7(a), and (ii) liens for current taxes and assessments not in default (collectively, "Permitted Encumbrances"). Copies of the most current title insurance policies, commitments or binders issued to or in the possession of Lessor with respect to the real property described in Schedule A to the Lease are set forth as part of Schedule 4.7(b). Such real property and structures and all machinery and equipment owned or leased by Lessor, are in good operating condition and repair (ordinary wear and tear excepted), taking into account their respective ages and consistent with their past uses, and are adequate for the uses to which they are being put. Except as set forth on Schedule 4.7(c), such buildings and improvements are structurally sound and are in good operating condition and repair (ordinary wear and tear excepted). Lessor has not received any notice of any violation of any building, zoning or other law, ordinance or regulation in respect of such property or structures or their use by Lessor. To Lessor's best knowledge, there is no existing, proposed or contemplated plan to modify or realign any street or highway or any existing, proposed or contemplated eminent domain proceeding that would result in the taking of all or any part of the Hospital facilities or that would materially adversely affect the current or planned use of the Hospital facilities or any part thereof. Schedule 4.7(d) contains rent rolls for each building in which Lessor leases or subleases space to tenants, which rent rolls identify each building and its total square footage, and, with respect to each lease or sublease, identify (a) the tenant or subtenant, (b) the number of square feet leased, (c) the term commencement date and expiration date, (d) the annual or monthly rent and (e) tenant's suite number. 4.8 Employee Benefit Plans. Schedule 4.8 lists (i) any "employee benefit plans" as defined in ERISA (other than a defined contribution pension plan not requiring any contribution by Lessor, Lessor's paid time off policy, and employee group life and health insurance plans that are fully funded through commercial insurance) and (ii) any defined benefit "employee pension benefit plans" (as defined in ERISA). 4.9 Litigation or Proceedings. Schedule 4.9 contains a list of each lawsuit or legal proceeding to which Lessor is a party or which arose out of or in connection with the Business or which, to the best of Lessor's knowledge, has been threatened against Lessor in connection with the Business. Since June 30, 1996, Lessor has not been subject to any formal or informal (of which Lessor has received notice) investigations or proceedings of the California Department of Health, the United States General Accounting Office, the Health Care Financing Administration or other similar governmental agencies (except for any investigations being conducted in the ordinary course of business and applicable to all hospitals) with respect to the Hospital. There are no such claims, actions, proceedings or investigations of which Lessor has received notice pending or, to the best of Lessor's knowledge, threatened challenging the validity or propriety of the transactions contemplated by this Annex A. Lessor is not now, and has not been, a party to any injunction, order, or decree restricting the method of the conduct of its business or the marketing of any of its services, nor has any governmental agency investigated or requested (other than on a routine basis) information with respect to such 17 76 methods of business or marketing of services; Lessor has not received any claim that Lessor currently violates any federal, state, or local law, ordinance, rule or regulation, which could have a material adverse effect on the Business and no such claim is or has been threatened; and there have been no developments materially adverse to Lessor with respect to any pending or threatened claim, action or proceeding of an administrative or judicial nature, including but not limited to those referred to in Schedule 4.9, and including without limitation any such pending or threatened claim, action or proceeding arising from or relating to (i) the assertion by any governmental authority of any retroactive adjustment of the sums which Lessor was entitled to receive pursuant to government or third party reimbursement programs such as (but not limited to) Medicare and Medicaid, or (ii) any allegation by any governmental authority of fraud or abuse by any current or former officers or employees of Lessor in connection with the making of any application for reimbursement pursuant to the government or third party reimbursement programs referred to in the preceding clause (i). 4.10 Insurance. Schedule 4.10(a) is a list and brief description of all policies or binders of fire, liability, product liability, workers' compensation, health and other forms of insurance policies or binders currently in force insuring Lessor against risks which will remain in full force and effect (or will be replaced by substantially similar coverage) at least through the Closing Date. Schedule 4.10(b) contains a description of all malpractice liability insurance policies of Lessor. Except as set forth on Schedule 4.10(c), (i) Lessor has never filed a written application for any insurance coverage which has been denied by an insurance agency or carrier and (ii) Lessor has been continuously insured for professional malpractice claims for at least the past seven (7) years, including periods during which Lessor was self-insured. Schedule 4.10(c) also sets forth a list of all claims for any insured loss in excess of $5,000 per occurrence, filed by Lessor during the three (3) year period immediately preceding the Closing Date, including but not limited to, workers' compensation, general liability, environmental liability and professional malpractice liability claims. Lessor is not in material default with respect to any provision contained in any such policy and has not failed to give any notice or present any claim under any such policy in due and timely fashion. 4.11 Post-Balance Sheet Results. Except as set forth on Schedule 4.11, since June 30, 1996 with respect to the Business, there has not been: (a) any damage, destruction or loss (whether or not covered by insurance) materially adversely affecting the Business, taken as a whole; (b) any sale, lease, transfer or disposition by Lessor of the Business; or (c) any change or the occurrence of any fact or condition which may be reasonably expected to have a material adverse effect on the Business or the value of the Business, other than such changes, facts and conditions, if any, affecting the City of Needles, California hospital service area generally, the general economy or the healthcare industry generally. 18 77 4.12 Lessor's Employees. Schedule 4.12 contains a list of all of Lessor's employees, their current salary or wage rates, department and a job title or other summary of the responsibilities of such employees. Since June 30, 1996 there has not been any increase in the compensation payable or to become payable by Lessor to any of Lessor's officers, employees or agents, or any bonus payment or arrangement made to or with any such person, except as described in Schedule 4.12. Lessor has not incurred any liability, or taken or failed to take any action which will result in any liability, in respect of any failure to comply with the Fair Labor Standards Act or any other applicable laws dealing with minimum wages or maximum hours for employees. Except as set forth on Schedule 4.12, all employees of Lessor are terminable at will by Lessor. Schedule 4.12 includes a list of all employees of Lessor (other than "part-time employees") who have been "terminated" or "laid-off" since January 1, 1997 (as such quoted terms are defined in the Worker Adjustment and Retraining Notification Act). 4.13 Labor Matters. Lessor has no collective bargaining agreements with any labor union, and there are no current negotiations with a labor union. Lessor is in compliance in all material respects with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice. There is no unfair labor practice complaint against Lessor pending before the National Labor Relations Board. There is no labor strike, dispute, slowdown or stoppage actually pending or, to the best knowledge of Lessor, threatened against or affecting Lessor. No grievance which might have an adverse effect on Lessor or any such arbitration proceeding arising out of or under collective bargaining agreements is pending, and no claim therefor exists. Lessor has not experienced any employee strikes since the date the Hospital began operation. 4.14 Certain Representations With Respect to the Business. (a) The Hospital has current contractual arrangements with Blue Cross. Complete and accurate copies of the existing Blue Cross contracts of the Hospital have been furnished to Lessee. The Hospital is presently in compliance with all of the terms, conditions and provisions of such contracts. (b) The Hospital is duly accredited as a general hospital by the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), and a copy of its most recent report, list of deficiencies, if any, and Certificate of Accreditation relating to the Hospital is included in Schedule 4.14. (c) The Hospital is qualified for participation in the Medicare program. Complete and accurate copies of Lessor's existing Medicare contracts for the Hospital have been furnished to Lessee. The Hospital is presently in compliance with all of the terms, conditions and provisions of such contracts. (d) The Hospital is qualified for participation in the Medicaid program. Complete and accurate copies of Lessor's existing Medicaid contracts 19 78 for the Hospital have been furnished to Lessee. The Hospital is presently in compliance with all of the terms, conditions and provisions of such contracts. (e) The Hospital participates in the CHAMPUS program. The Hospital is presently in compliance in all material respects with all of the terms and conditions of such participation. (f) Included in Schedule 4.14 are copies of the fire marshall reports with respect to the Hospital since January 1, 1994. The Hospital is not in violation in any material respect of any fire code. (g) Except as set forth in Schedule 4.14, Lessor has received no written notification that the Hospital is in violation of local building codes, ordinances or zoning laws. The building or buildings in which the Hospital is located comply in all material respects with all local building codes, ordinances and zoning laws and are in a state of good condition and repair, normal wear and tear excepted. (h) Included in Schedule 4.14 is a copy of all licensure survey reports of the Hospital by the California Department of Health since January 1, 1994. (i) Included in Schedule 4.14 are copies of the Bylaws of the Medical Staff of the Hospital and copies of minutes of meetings thereof since January 1, 1996. No proceedings are pending or threatened seeking to remove or limit the privileges of any member of the medical staff of the Hospital. (j) Complete and accurate copies of all appraisals, if any, obtained by Lessor since January 1, 1994, relating to the Hospital or any of its assets have been furnished to Lessee. (k) The Hospital is licensed by the California Department of Health as a general acute care hospital authorized to operate a 53-bed general acute care hospital in its existing facilities located in the City of Needles, California. Except as set forth in Schedule 4.14, the Hospital is presently in compliance in all material respects with all the terms, conditions and provisions of such licenses. Schedule 4.14 also contains a copy of such licenses. The facilities, equipment, and operations of the Hospital satisfy, without material exception, the applicable hospital licensing requirements of the State of California. 4.15 Reimbursement Matters. Complete and accurate copies of all Medicare cost reports and related forms filed during the past three years by Lessor have been furnished to Lessee. To the best of knowledge and belief of Lessor, the amounts set up as provisions for the Medicaid or Medicare adjustments and adjustments by any other third party payors on the Financial Statements are sufficient to pay any amounts for which Lessor may be 20 79 liable. Lessor has received no written notices that Medicare or Medicaid have any claims against it which may reasonably be expected to result in consolidated net offsets against future reimbursement in excess of that provided for in such financial statements. Neither Lessor nor any of its employees have committed a violation of the Medicare and Medicaid fraud and abuse provisions of the federal Social Security Act. Lessor agrees that Lessee may, in its discretion, reopen cost reports for any period prior to Closing, and that Lessee shall be entitled to retain any amounts which would be payable to Lessor as a result of any adjustments thereto. Lessee agrees that it shall be responsible for any amounts which may be payable by Lessor occasioned by Lessee's reopening thereof, and agrees to indemnify and hold Lessor harmless from and against any such liability. 4.16 Hill-Burton Funds. To the best of Lessor's knowledge, to the extent funds have been received on behalf of Lessor or any predecessor of Lessor to construct, improve or acquire any of the Assets under the "Hill-Burton" Act, the financial obligation in respect of such funds has been fully satisfied, and Lessee shall not be required to pay, or otherwise satisfy, any amounts as a "recovery" or otherwise as a result of the consummation of the transactions contemplated by this Annex A. 4.17 Taxes. Lessor has filed all tax returns required by law to be filed and has paid all taxes, assessments and other governmental charges shown thereon as due and payable, other than those presently payable without penalty or interest or those being contested in good faith by appropriate procedures. There are no liens with respect to taxes (except for liens with respect to property taxes not yet due) upon any of the Assets. Lessor has not conducted the Business or engaged in any transaction which would cause the transaction contemplated hereby to be taxable under the California sales and use tax laws. 4.18 Equipment. All assets of Lessor consisting of equipment listed on Schedule B to the Lease are in good operating condition and repair, ordinary wear and tear excepted. Except as disclosed on Schedule 4.18, the only transactions related thereto since June 30, 1996, have been additions thereto in the ordinary course of business. All of such equipment (except for leased items for which the lessors have valid security interests) at the Closing will be free and clear of any lien or security interest or other encumbrance other than Permitted Encumbrances. 4.19 Payments. Neither Lessor nor any affiliate or representative thereof has, directly or indirectly, paid, delivered or agreed to pay or deliver any fee, commission or other sum of money or item of property, however characterized, to any person, government official or other party with respect to the Hospital or the Business that has or is illegal under any federal, state or local law. 4.20 Absence of Undisclosed Liabilities. Except as and to the extent reflected or specifically reserved against (which reserves are believed adequate in amount) in the Financial Statements or any financial statements prepared in respect of Lessor's business thereafter, Lessor did not have, at the date of such financial statements, any material liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise and whether due or to become due) required to be reflected thereon or included therein, except for any liabilities 21 80 which were incurred in the ordinary course of business consistent with past practice or have been discharged or paid in full prior to the date hereof. 4.21 No Misleading Statements. No representation or warranty by Lessor contained in the Lease or this Annex A, and no statement contained in any Schedule (including any supplement or amendment thereto) and the documents to be delivered at the Closing by or on behalf of Lessor to Lessee or any of its representatives in connection with the transactions contemplated hereby (the Schedules, including any supplement or amendment thereto, and such other documents are herein referred to, collectively, as the "Additional Documents"), and no written statement made or delivered by Lessor in connection with this Annex A or the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or, to the best of their knowledge after due inquiry, omits or will omit to state any material fact necessary, in light of the circumstances under which it was or will be made, in order to make the statements herein or therein not misleading. Copies of all documents described on any Schedule hereto shall be true, correct and complete, and all descriptions of such documents shall be true and complete. 5. Representations and Warranties of Lessee. As of the date hereof Lessee represents and warrants to Lessor the following: 5.1 Lessee Capacity. Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of Tennessee with all requisite power and authority to own, operate and lease its properties, and carry on its business in California. 5.2 Corporate Authorization/Contract Binding. The execution, delivery and performance by Lessee of the Lease and this Annex A and the other agreements and transactions contemplated hereby are within Lessee's power, are not in contravention of the terms of Lessee's Articles of Incorporation or Bylaws, or any amendments thereto. No provisions exist in any document or instrument to which Lessee is a party or by which Lessee is bound which would be violated by the execution of, or the performance by Lessee, and the consummation by Lessee of the transactions contemplated by, this Annex A. This Annex A will, upon execution, constitute the valid, legal and binding obligation of Lessee, enforceable against Lessee in accordance with its terms except as such may be limited by bankruptcy and other laws of general applicability affecting sellers' and creditors' rights and general equitable principles. 5.3 No Misleading Statements. No representation or warranty by Lessee contained in the Lease or this Annex A, and no statement contained in any of the documents to be delivered at the Closing by or on behalf of Lessee to Lessor or any of its representatives in connection with the transactions contemplated hereby, and no written statement made or delivered by Lessee in connection with this Annex A or the transactions contemplated hereby, contains or will contain any untrue statement of a material fact, or, to the best of its knowledge after due inquiry, omits or will omit to state any material fact necessary, in light of the circumstances under which it was or will be made, in order to make the statements herein or therein not misleading. 22 81 5.4 Full Disclosure. During the term of its management and operation of the Business, which term began on November 1, 1996, and continuing through the date of this Agreement, neither Lessee nor any of its Affiliates (as that term is defined in the Lease) or any of their respective officers, directors, employees or agents, has any actual notice or has any actual knowledge of any fact or other information which would cause Lessor to be in default of any representation, warranty, covenant or other agreement made by Lessor in this Agreement or in the Lease. Lessee expressly agrees to forfeit any and all rights of indemnification under Section 8.2 hereof or elsewhere herein or in the Lease with respect to the breach of any such representation, warranty, covenant or other agreement made by Lessor to the extent of any breach by Lessee of the representation and warranty contained in this Section 4.4. 6. Covenants of Lessor. Lessor covenants and agrees as follows:: 6.1 Information. Between the date of this Annex A and the Closing Date, Lessor shall afford to the officers and authorized representatives of Lessee reasonable access during normal business hours to the Hospital and to Lessor's books and records and will furnish to Lessee such additional financial data and other information relating to the Hospital or the Business as Lessee may from time to time reasonably request. Lessor covenants and agrees to cooperate reasonably with Lessee in Lessee's efforts (i) to make any required filings and to obtain any governmental approvals necessary in order to consummate the transactions contemplated hereby, (ii) to respond to any governmental investigation of such transactions, and (iii) to defend any legal or administrative proceedings challenging such transactions. Lessor will, upon reasonable request, cooperate with Lessee, Lessee's representatives and counsel in the preparation of any document or other material which may be required by any governmental agency as a predicate to or result of the transactions herein contemplated. With respect to Confidential Information provided by Lessor in connection with and relative to the transactions contemplated by this Annex A, Lessee covenants and agrees to use reasonable efforts to cause its officers, employees, representatives and agents to hold all such Confidential Information in strict confidence, unless compelled to disclose by judicial or administrative process, and to return all originals and copies of any such written Confidential Information to Lessor in the event for any reason the transactions herein are not consummated. Any release to the public of information with respect to the transactions herein will be made only in the form and manner approved by the parties and their respective representatives. Lessee covenants and agrees that it will not use, and will not knowingly permit others to use, any Confidential Information in a manner detrimental to the Business or Lessor or to their competitive disadvantage. For the purposes hereof, "Confidential Information" shall mean all information of any kind concerning Lessor, obtained, directly or indirectly, from Lessor in connection with the transactions contemplated by this Annex A except information (i) ascertainable or obtained from public or published information, (ii) received from a third party not known by Lessee to be under an obligation to Lessor to keep such information confidential, (iii) which is or becomes known to the public (other than through a breach of this Annex A), or (iv) which was in Lessee's possession prior to disclosure thereof to Lessee at any time prior to the commencement of Lessee's management and operation of the Business on November 1, 1996. 23 82 6.2 Operations. Between the date of this Annex A and the Closing Date, with respect to the ownership of the Assets and operation of the Business, Lessor will: (a) carry on Lessor's business in substantially the same manner as Lessor has heretofore and not make any material change in personnel or operations, and not make any change in finance or accounting policies; (b) maintain the assets of the Business in substantially as good working order and condition as at present, ordinary wear and tear excepted; (c) perform in all respects Lessor's obligations under agreements relating to or affecting the Business; (d) keep in full force and effect present insurance policies or other comparable insurance coverage; (e) use its reasonable best efforts to maintain and preserve Lessor's business organization intact, retain Lessor's present employees and maintain Lessor's relationship with suppliers, customers and others having business relations with Lessor; (f) within a reasonable time prior to Closing, permit Lessee to make offers to any of Lessor's personnel who work at the Hospital for employment by Lessee subsequent to the Closing, which personnel shall be allowed to accept or reject such offers without penalty; (g) terminate the participation of the employees that are hired by Lessee in Lessor's employee health or welfare benefit plans, if any, and comply with the terms and conditions of all such plans; (h) not effect, grant or pay any increase in compensation to any employee, officer or director of Lessor other than annual raises and bonuses to employees and officers consistent with those effected, granted or paid in prior years or otherwise pursuant to existing policies; and 6.3 Certain Changes. Except as described in Schedule 6.3, between the date of this Annex A and the Closing Date, Lessor will not, without the prior written consent of Lessee: (a) license or sell or agree to license or sell any of the Assets except for the depletion of inventories sold in the ordinary course of Lessor's business; or (b) engage in any transaction out of the ordinary course of business, including any sale, transfer, lease, encumbrance or granting of a 24 83 security interest in any portion of the Assets (except as provided in Section 6.3(a) above); or (c) acquire, or make any capital expenditure in respect of, any additional items of property, plant or equipment having a value in excess of $1,000 with respect to any one item or $10,000 in the aggregate. Lessor agrees to consult with Lessee with respect to entering into, renewing or terminating any contract or lease relating to the Business and will not enter into, renew or terminate any such contract or lease without the prior written consent of Lessee. 6.4 Casualty. If any material part of the Hospital is damaged so as to be rendered unusable or destroyed prior to Closing, Lessee may elect to terminate the Lease and this Annex A and all obligations of the parties hereunder. 6.5 Best Efforts to Close. Lessor shall use its best efforts to proceed toward the Closing and to cause the conditions to Closing to be met as soon as practicable and consistent with other terms contained herein. Lessor shall notify Lessee as soon as practicable of any event or matter which comes to Lessor's attention which may reasonably be expected to prevent the conditions to Lessor's obligations being met. 6.6 Final Cost Report. Within one hundred fifty (150) days after Closing, Lessor shall furnish to Lessee a copy of Lessor's final cost report filed in respect of the Medicare and Medicaid programs, or any successor governmental program, reflecting consummation of the transactions contemplated hereby. 6.7 Consents. Lessor will use its reasonable best efforts to obtain all permits, approvals, authorizations and consents of all third parties necessary in the reasonable opinion of Lessee, prudent for the purpose of (i) consummating the transactions contemplated hereby, or (ii) enabling the Lessee to continue to operate the Business in the ordinary course after the Closing. 6.8 Insurance. Lessor shall take all action reasonably requested by Lessee to enable it to succeed to the Workmen's Compensation and Unemployment Insurance ratings, insurance policies, deposits and other interests of Lessor and other ratings for insurance or other purposes established by Lessor. Lessee shall not be obligated to succeed to any such rating, insurance policy, deposit or other interest, except as it may elect to do so. 6.9 Notice; Efforts to Remedy. Lessor shall promptly give written notice to Lessee upon becoming aware of the impending occurrence of any event which would cause or constitute a breach of any of the representations, warranties or covenants of Lessor contained or referred to in this Annex A and shall use its reasonable best efforts to prevent or promptly remedy the same. 6.10 Supplements to Schedules. From time to time prior to the Closing, Lessor will promptly supplement or amend the Schedules prepared pursuant to Section 25 84 4 hereof with respect to any matter hereafter arising which, if existing or occurring at the date of this Annex A, would have been required to be set forth or described in the Schedules or which is necessary to correct any information in the Schedules which has been rendered inaccurate thereby; provided, however, that upon delivery of any such supplement or amendment to the Schedules, Lessee shall have the right to terminate this Annex A by notifying Lessor of its election to so terminate. 6.11 Non-Competition. During the term of the Lease, neither Lessor nor any of its subsidiaries or affiliates shall, without the prior written consent of Lessee, directly or indirectly, (i) engage in the construction or operation of any hospital or of any other health care facility which provides services similar to the services provided by the Hospital or (ii) acquire, lease or own, serve as a member or be a shareholder of or otherwise exercise management control over a hospital or of any other health care facility which provides services similar to the services provided by the Hospital, which, in respect of (i) and (ii) above, is located within one hundred (100) miles of the City of Needles, California. 6.12 Medical Office Building. Lessor acknowledges that Lessee may, in the exercise of its sole discretion, determine to build or to have built a medical office building ("MOB") on the campus of the Hospital. If Lessee so determines that development of an MOB is appropriate or desirable, Lessor agrees to use its reasonable best efforts to cooperate with Lessee with respect to the financing and development of such MOB, provided that Lessor is not hereby required to make any financial commitment with respect thereto. 7. Covenants of Lessee. Lessee covenants and agrees as follows: 7.1 Best Efforts to Close. Lessee shall use its best efforts to proceed toward the Closing and to cause the conditions to Closing to be met as soon as practicable and consistent with other terms contained herein. Lessor shall notify Lessee as soon as practicable of any event or matter which comes to Lessor's attention which may reasonably be expected to prevent the conditions to Lessor's obligations being met. 7.2 Consents. Lessee will use its reasonable best efforts to obtain all permits, approvals, authorizations and consents of all third parties necessary in the reasonable opinion of Lessee, prudent for the purpose of (i) consummating the transactions contemplated hereby, or (ii) enabling the Lessee to continue to operate the Business in the ordinary course after the Closing. 7.3 Notice; Efforts to Remedy. Lessee shall promptly give written notice to Lessor upon becoming aware of the impending occurrence of any event which would cause or constitute a breach of any of the representations, warranties or covenants of Lessee contained or referred to in this Annex A and shall use its reasonable best efforts to prevent or promptly remedy the same. 26 85 7.4 MIS System. Lessee shall provide a new management information system for use in the operation of the Hospital within the first year of the Lease. Lessee anticipates that the cost of such system shall be approximately Four Hundred Thousand Dollars ($400,000). 7.5 New Equipment. Lessee shall purchase at least One Million Dollars ($1,000,000) of new equipment for use in the Hospital within the first two (2) years of the Lease. In addition, Lessee shall pay for that certain "C-arm" previously ordered by Lessor. Notwithstanding the foregoing, title to such "C-arm" shall be in the name of Lessor, and such "C-arm" shall be a part of the "Equipment" (as that term is defined in the Lease) leased to Lessee pursuant to the terms and conditions of the Lease. The equipment required to be purchased by Lessee pursuant to this Section shall be in addition to the mechanical upgrades purchased by Lessor pursuant to Section 3 of the Lease. 7.6 Working Capital. Lessee shall provide up to Two Million Dollars ($2,000,000) in new working capital for use in the operation of the Hospital. 7.7 Full Disclosure. On and from the date hereof continuing to and including the Closing, Lessee covenants and agrees to disclose to Lessor in writing any and all notices it or any of its Affiliates, or any of their respective officers, directors, employees or agents, receive, and any actual knowledge of any fact or other information which they now have or hereafter acquire, which would cause Lessor to be in default of any representation, warranty, covenant or other agreement made by Lessor in this Agreement or in the Lease. Lessee expressly agrees to forfeit any and all rights of indemnification under Section 8.2 hereof or elsewhere herein or in the Lease with respect to the breach of any such representation, warranty, covenant or other agreement made by Lessor to the extent of any breach by Lessee of the covenant and agreement contained in this Section 7.7. 7.8 Best Efforts to Obtain Loan. Lessee shall use its best efforts to obtain and close the loan referred to in Section 9.13 of this Annex A or, at Lessee's option, shall waive such condition precedent to the Closing. 7.9 Tail Insurance. Lessee will obtain, at its expense, "tail" malpractice insurance coverage which (a) provides coverage for an unlimited period of time for claims asserted after Closing; (b) provides coverage of not less than $1,000,000.00 per claim; (c) is provided by a carrier reasonably acceptable to Lessor; and (d) names Lessor as an additional insured. 8. Indemnification. 8.1 Indemnity by Lessee. Lessee shall indemnify, defend and hold harmless Lessor, its City Council, respective officers, directors, employees and agents (jointly and severally, "Lessee Indemnified Parties") from and against any and all liabilities, losses, damages, demands, claims, suits, actions, judgments, causes of action, assessments, costs and expenses, including, without limitation, interest, penalties, attorneys' fees, any and all expenses incurred in investigating, preparing and defending against any litigation, commenced or 27 86 threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation (collectively, "Damages"), asserted against, resulting to, imposed upon, or incurred or suffered by any of them, directly or indirectly, as a result or arising from the following: (i) any inaccuracy in or breach or nonfulfillment of any of the representations, warranties, covenants or agreements made by Lessee in this Annex A or the other agreements contemplated hereby; (ii) any liability imposed on Lessor to the extent such liability has been expressly assumed by Lessee pursuant to this Annex A or the Assumption Agreement; (iii) any misrepresentation in or any omission from any certificate or other document (collectively, the "Additional Documents") furnished or to be furnished by or on behalf of Lessee under this Annex A; (iv) any liability threatened or imposed on Lessor arising out of Lessee's operation of the Business as manager of the Hospital from and after November 1, 1996 and as lessee and operator from and after Closing, whether or not such liability has been expressly assumed by Lessee pursuant to any provision of this Annex A; and (v) any liability threatened or imposed on Lessor arising out of a breach by Lessee of Sections 5.4 or 7.7 which would otherwise not have been threatened or imposed on Lessor had Lessee not breached Section 5.4 or 7.7. The indemnification obligations of Lessee with respect to those matters set forth in subsections (i), (ii) and (iii), above, shall survive for a period not to exceed the greater of (i) the applicable statute of limitations period under California law, if any, or (ii) five (5) years. The indemnification obligations of Lessee with respect to those matters set forth in subsections (iv) and (v), above, shall survive indefinitely. To be entitled to such indemnification, Lessee Indemnified Party shall give Lessee prompt written notice of any breach or of the assertion by a third party of any claim with respect to which Lessee Indemnified Party may bring a claim for indemnification hereunder, and in all events must have supplied such notice to Lessee within the period for the defense of such claims by Lessee. Lessee shall have the right, at its own expense, to defend and litigate any such third party claim, and such Lessee Indemnified Party shall cooperate in good faith with Lessee to permit Lessee to do so. Should such Lessee Indemnified Party settle or compromise any claim or matter for which an indemnity would be payable by a Lessee hereunder without the prior written consent of such Lessee, Lessee shall be relieved of any liability hereunder to such Lessee with respect to such claim or matter. 8.2 Indemnity by Lessor and the City of Needles, California. Subject to the provisions of Section 5.4 and Section 7.7, for a period not to exceed the greater of (i) the applicable statute of limitations period under California law, if any, or (ii) five (5) 28 87 years from and after Closing, Lessor and the City of Needles, California (jointly and severally, the "Lessor Indemnifying Party") shall indemnify, defend and hold harmless Lessee and its respective officers, directors, employees, shareholders and agents (jointly and severally, the "Lessor Indemnified Parties") from and against any and all Damages asserted against, resulting to, imposed upon, or incurred or suffered by any of them, directly or indirectly, as a result or arising out from the following: (i) any inaccuracy in or breach or nonfulfillment of any of the representations, warranties, covenants or agreements made by Lessor in this Annex A or the other agreements contemplated hereby; (ii) any liability of Lessor or liability, including without limitation professional malpractice or general liability claims and claims of liability under either the Medicare or Medicaid programs, arising out of the operation of the Business prior to the Closing which is imposed on Lessee, except to the extent such liability has been expressly assumed by Lessee pursuant to this Annex A or the Assumption Agreement; (iii) any misrepresentation in any certificate or other document (collectively, the "Additional Documents") furnished or to be furnished by or on behalf of Lessor under this Annex A; and (iv) any liability threatened or imposed on Lessee arising out of Lessor's operation of the Business on or before the Closing Date. To be entitled to such indemnification, a Lessor Indemnified Party shall give Lessor Indemnifying Party prompt written notice of any breach or the assertion by a third party of any claim with respect to which a Lessor Indemnified Party may bring a claim for indemnification hereunder, and in all events must have supplied such notice to Lessor Indemnifying Party within the applicable period for defense of such claims by Lessor Indemnifying Party. At the request of Lessor Indemnifying Party, Lessor Indemnified Party shall contest in good faith by appropriate proceedings any claim or matter for which an indemnity may be payable by Lessor Indemnifying Party hereunder. In the alternative, Lessor Indemnifying Party shall also have the right, at its own expense, and at its option, to contest any such third party claim, and such Lessor Indemnified Party shall cooperate in good faith with Lessor Indemnifying Party to permit Lessor Indemnifying Party to do so. Should such Lessor Indemnified Party settle or compromise any claim or matter for which an indemnity may be payable by Lessor Indemnifying Party hereunder without the prior written consent of Lessor Indemnifying Party, Lessor Indemnifying Party shall be relieved of any liability hereunder with respect to such claim or matter. In addition to the foregoing, if any third party payor deducts any amount from payments due Lessor Indemnified Party in respect of claims against or amounts owed by Lessor Indemnifying Party, Lessor Indemnifying Party will promptly reimburse Lessor Indemnified Party for the amounts so deducted within ten (10) days after written demand therefor by Lessor Indemnified Party. Lessor Indemnified Party agrees to give prompt written notice to Lessor 29 88 Indemnifying Party of the assertion of any claim, formal or informal, by any third party payor for which, if deducted by such third party payor, Lessor Indemnified Party would be entitled to reimbursement by Lessor Indemnifying Party hereunder and will cooperate in good faith, at no out-of-pocket cost to Lessor Indemnified Party, with Lessor Indemnifying Party to permit Lessor Indemnifying Party to mitigate the amount of any such claim by any such third party payor. 8.3 Thresholds. Except for the indemnification obligations of Lessee set forth in Sections 8.1(iv) and (v), above, for which there shall be no threshold, Lessee shall be liable to a Lessee Indemnified Party under Section 8.1 only after total indemnification claims under Section 8.1 exceed $30,000 in the aggregate for any year during the five (5) year indemnification period. Lessor and The City of Needles, California shall be liable, jointly and severally, to a Lessor Indemnified Party under Section 8.2 only after total indemnification claims under Section 8.2 exceed $30,000 in the aggregate for any year during the five (5) year indemnification period. Once such threshold is met in any year, Lessee or Lessor and the City of Needles, California, as the case may be, shall be liable for the amount of the claims in such year in excess of such threshold. 9. Conditions Precedent to Obligations of Lessee. The obligations of Lessee hereunder are subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived in writing by Lessee: 9.1 Representations/Warranties. The representations and warranties of Lessor contained in this Annex A shall be true and correct as of the Closing Date; and the covenants and conditions of this Annex A to be complied with or performed by Lessor on or before the Closing Date pursuant to the terms hereof shall have been duly complied with and performed. 9.2 Opinion of Lessor's Counsel. Lessee shall have received an opinion from Best Best and Krieger LLP, counsel to Lessor and to the City of Needles, California, dated as of the Closing Date and addressed to Lessee, to the effect that: (i) Lessor has been duly appointed by the Mayor of the City of Needles, California pursuant to Section 37603 of Title 4, Division 3, Part 2, Chapter 5, Article 7 of the Government Code of the State of California; (ii) Lessor has full power and authority to make, execute, deliver and perform the Lease and this Annex A, and all proceedings required to be taken by Lessor to authorize the execution and performance of the Lease and this Annex A, and to sell, convey, assign, transfer and deliver the Assets described in Section 1.3, as herein contemplated have all been duly taken and in accordance with any applicable Sunshine Law; (iii) the City Council of the City of Needles has taken all necessary action to approve and consent to, and has approved and consented to Lessor to execute and perform the Lease and this Annex A; (iv) the Lease and this Annex A and all, assignments and other instruments of conveyance and transfer delivered hereunder constitute the valid and binding obligations of Lessor, enforceable in accordance with their terms, subject to bankruptcy and other similar laws affecting creditors' rights and debtors' relief generally and subject to general principles of equity; (v) except as specifically set forth in Annex A or any Schedule to Annex A, neither the execution and delivery of the Lease and this Annex A nor the consummation of the asset sale transaction herein contemplated conflicts with, or results in a breach of, any resolution or act or governing instrument of Lessor or any 30 89 material agreement or instrument known to Lessor's counsel to which Lessor is a party or by which Lessor or the Assets are bound; and (vi) such other matters as may be reasonably requested by Lessee. 9.3 Pre-Closing Confirmations. Lessee shall have obtained documentation or other evidence confirming the following: (a) confirmation and effective transfer or reissuance of the appropriate licensure of the Hospital if and to the extent required by the State of California for its continued operation after Closing; and (b) confirmation of Medicare and Medicaid certification of the Hospital if and to the extent required for its continued operation after Closing. 9.4 Action or Proceeding. No action, proceeding, investigation or administrative hearing before a court or any other governmental agency or body shall have been instituted or threatened against Lessor or Lessee which seeks injunctive relief in anticipation of the sale of the Assets and may reasonably be expected to prohibit the sale of the Assets to Lessee or seeks damages in a material amount by reason of the consummation of such sale. 9.5 Schedules. Lessee shall have been furnished with those Schedules enumerated on the Table of Schedules updated to the most recent practicable date prior to Closing to the extent of any changes therein to which Lessor has knowledge and Lessee shall not have expressed reasonable objection to Lessor in writing with respect thereto. 9.6 Consents; Licenses. All notices to, and consents, authorizations, approvals and waivers from, third parties required for Lessor to consummate the transactions contemplated hereby or required in connection with Lessor's assignment and Lessee's assumption of any Contract or Lease shall have been made and obtained. Lessee shall have reason to believe that the California Department of Health shall issue to Lessee promptly after the Closing a license to operate the Hospital and all presently authorized supplemental and special services shall be so authorized for Lessee on and after Closing. 9.7 Proceedings and Documents Satisfactory. Lessee shall have received such certificates, opinions and other documents as it or its counsel may reasonably require in order to consummate the transactions contemplated hereby, all of which shall be in form and substance reasonably satisfactory to it and its counsel. All proceedings in connection with the transactions contemplated herein and all certificates and documents delivered to Lessee pursuant to this Annex A shall be reasonably satisfactory in form and substance to Lessee and its counsel acting reasonably and in good faith. 9.8 Delivery of Certain Documents. At the Closing, Lessor shall have delivered to Lessee all documents, agreements and instruments contemplated by Section 2.2. 31 90 9.9 Environmental Survey. Lessee shall have received environmental assessments, satisfactory in form and substance, with respect to the real property. 9.10 Adverse Changes. There shall not have occurred after June 30, 1996, any change in or effect on Lessor that is, or with reasonable certainty might be, materially adverse to its business, prospects, operations, properties, assets, liabilities or condition (financial or otherwise). 9.11 Bond Financing. Lessor's Bond indebtedness secured by the Hospital shall have been paid off or defeased to the satisfaction of Lessee. 9.12 Approval of Schedules. Lessee and Lessor shall have mutually agreed upon the content of each Schedule hereto. 9.13 New Loan. Lessee shall have obtained and closed a loan with an institutional lender satisfactory to Lessee on terms and conditions satisfactory in all respects to Lessee in an amount deemed by Lessee necessary to consummate the transactions contemplated by the Lease and this Annex A. 10. Conditions Precedent to Obligations of Lessor. The obligations of Lessor hereunder are subject to the satisfaction, on or prior to the Closing Date, of the following conditions unless waived in writing by Lessor: 10.1 Representations/Warranties. The representations and warranties of Lessee contained in this Annex A shall be true and correct as of the Closing Date; and the covenants and conditions of this Annex A to be complied with or performed by Lessee on or before the Closing Date pursuant to the terms hereof shall have been duly complied with and performed. 10.2 Opinion of Lessee's Counsel. Lessor shall have received from Waller Lansden Dortch & Davis, A Professional Limited Liability Company, counsel to Lessee, an opinion dated as of the Closing Date addressed to Lessor, in form and substance satisfactory to Lessor to the effect that: (i) Lessee is a corporation validly existing and in good standing under the laws of the State of Tennessee and is duly qualified to do business in the State of California; (ii) the execution, delivery and performance of the Lease and this Annex A has been duly authorized by all requisite action; (iii) Lessee has full power and authority to make, execute, deliver and perform the Lease and this Annex A, and all proceedings required to be taken by Lessee to authorize the execution and performance of the Lease and this Annex A as herein contemplated have all been duly and properly taken; (iv) the Lease and this Annex A constitute valid and binding obligations of Lessee, enforceable in accordance with their terms, subject to bankruptcy and other similar laws affecting creditors' rights or debtors' relief generally and subject to general principles of equity; (v) neither the execution and delivery of the Lease and this Annex A, nor the consummation of the transactions therein or herein contemplated, nor the compliance and fulfillment of the terms and conditions thereof or hereof will conflict with, or result in a breach of the terms, conditions or provisions of, or constitute a default under the Articles of Incorporation or Bylaws of Lessee or any agreement or instrument 32 91 known to Lessee's counsel to which Lessee is a party or by which Lessee is bound or affected; and (vi) such other matters as may be reasonably requested by Lessor. Lessee's counsel's opinion may state that such counsel is not admitted to practice in any state other than the State of Tennessee and may be limited to the laws of the State of Tennessee, the General Corporation Law of the State of Delaware, and the federal laws of the United States; provided however, that Lessee's counsel shall assume, in giving such opinion, that the laws of the State of California are identical with the laws of the State of Tennessee. 10.3 Action or Proceeding. No action, proceeding, investigation or administrative hearing before a court or any other governmental agency or body shall have been instituted or threatened against Lessee or Lessor which seeks injunctive relief in anticipation of the transactions contemplated herein and may reasonably be expected to prohibit the transactions contemplated herein or seeks damages in a material amount by reason of the consummation of such transactions. 10.4 Proceedings and Documents Satisfactory. Lessor shall have received such certificates, opinions and other documents as it or its counsel may reasonably require in order to consummate the transactions contemplated hereby, all of which shall be in form and substance reasonably satisfactory to it and its counsel. All proceedings in connection with the purchase of the Assets set forth herein and all certificates and documents delivered to Lessor pursuant to this Annex A shall be reasonably satisfactory in form and substance to Lessor and its counsel acting reasonably and in good faith. 10.5 Delivery of Certain Documents. At the Closing, the Lessee shall have delivered to Lessor all documents, agreements and instruments contemplated by Section 2.3. 10.6 Approval of Schedules. Lessee and Lessor shall have mutually agreed upon the content of each schedule hereto. 10.7 Pre-Closing Confirmations. Lessor shall have obtained documentation or other evidence confirming the following: (a) confirmation and effective transfer or reissuance of the appropriate licensure of the Hospital if and to the extent required by the State of California for its continued operation after Closing; and (b) confirmation of Medicare and Medicaid certification of the Hospital if and to the extent required for its continued operation after Closing. 10.8 Consents; Licenses. All notices to, and consents, authorizations, approvals and waivers from, third parties required for Lessor to consummate the transactions contemplated hereby or required in connection with Lessor's assignment and Lessee's assumption of any Contract or Lease shall have been made and obtained. Lessor shall have reason to believe that the California Department of Health shall issue to Lessee promptly after the Closing 33 92 a license to operate the Hospital and all presently authorized supplemental and special services shall be so authorized for Lessee on and after Closing. 10.9 Bond Financing. Lessor's Bond indebtedness secured by the Hospital shall have been paid off or defeased to the satisfaction of Lessee. 10.10 Adverse Changes. There shall not have occurred after June 30, 1996, any change in or effect on Lessee that is, or with reasonable certainty might be, materially adverse to its business, prospects, operations, properties, assets, liabilities or condition (financial or otherwise). 10.11 Fair Market Value Opinion. Lessor shall have received a written fair market value opinion from Arthur Anderson LLP covering the transactions contemplated by this Annex A and the Lease, with which Lessor, in its sole discretion, is satisfied. 11. General. 11.1 Appendices, Schedules and Other Instruments. Each Appendix, Schedule and Certificate, if any, to this Annex A shall be considered a part hereof as if set forth herein in full. 11.2 Pre-Closing Access. In addition to Lessor's covenants in Section 5.1, Lessor shall give Lessee, its accountants, its counsel, and other representatives reasonable access to the premises, books and records, and offices of the Hospital, and make such information in respect thereof as Lessee may reasonably request available to Lessee, as may be necessary for Lessee to examine the Assets being acquired. No such inspection by Lessee shall interfere with Lessor's conduct of business in the ordinary course. 11.3 Additional Assurances. The provisions of this Annex A shall be self-operative and shall not require further agreement by the parties except as may be herein specifically provided to the contrary; provided, however, at the request of either party, the other party shall execute such additional instruments and take such additional acts as are reasonably necessary to effectuate this Annex A. 11.4 Consents, Approvals and Discretion. Whenever this Annex A requires any consent or approval to be given by either party or either party must or may exercise discretion, the parties agree that such consent or approval shall not be unreasonably withheld or delayed and such discretion shall be reasonably exercised. 11.5 Choice of Law. THE PARTIES AGREE THAT THIS ANNEX A SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA. 34 93 11.6 Benefit; Assignment. Subject to the provisions herein to the contrary, this Annex A shall inure to the benefit of and be binding upon the parties hereto and their respective legal representatives, successors and assigns; provided, however, that no party may assign this Annex A without the prior written consent of the other party. 11.7 Brokerage. Lessor on one hand and Lessee on the other hand agree to indemnify the other parties from and against all loss, cost, damage or expense arising out of claims for fees or commissions of brokers employed or alleged to have been employed by such indemnifying party. 11.8 Cost of Transaction. Whether or not the transactions contemplated hereby shall be consummated, the parties agree as follows: (i) Lessor will pay the fees, expenses, and disbursements of Lessor and its agents, representatives, accountants, and counsel incurred in connection with the subject matter hereof and any amendments hereto; and (ii) Lessee shall pay the fees, expenses and disbursements of Lessee and its agents, representatives, accountants and counsel incurred in connection with the subject matter hereof and any amendments hereto. Lessor shall pay any transfer taxes and recording fees resulting from the consummation of the transactions contemplated hereby. 11.9 Confidentiality. It is understood by the parties that the information acquired by, and the documents and instruments delivered to, Lessee or the shareholder, affiliates, officers, employees or agents of Lessee (collectively, "Agents"), by Lessor or Lessor's officers, employees or agents (collectively, "Lessor" and "Lessor's Agents") are of a confidential and proprietary nature. Lessee agrees that it will and will use its best efforts to cause Agents to maintain the confidentiality of all such information, documents or instruments acquired by or delivered to Lessee and Agents in connection with the negotiation of this Annex A or in compliance with the terms, conditions and covenants hereof and only to disclose such information, documents and instruments to such duly authorized persons as are necessary to effect the transaction contemplated hereby. Lessee further agrees that if the transactions contemplated hereby are not consummated, Lessee and Agents will promptly return all documents and instruments acquired from Lessor or its affiliates and all copies thereof in their possession to Lessor, and will not use any such non-public information in any way to compete with Lessor or Lessor's respective affiliates, successors or assigns or in a manner which would be detrimental to the businesses, financial affairs or reputations of Lessor or Lessor's respective officers and affiliates, successors and assigns. Lessee for itself and Agents recognizes that any breach of this Section 10.9 would result in irreparable harm to Lessor and Lessor's respective officers and affiliates and that therefore either Lessor or any of Lessor's respective officers and affiliates shall be entitled to an injunction to prohibit any such breach by Lessee and Agents in addition to all of their other legal and equitable remedies. Nothing in this Section 10.9 shall prohibit the use of such confidential information, documents or information for such governmental filings as are required by law or governmental regulations or the disclosure of such confidential information if such disclosure is compelled by judicial or administrative process. 35 94 11.10 Waiver. The waiver by either party of a breach or violation of any term or provision of this Annex A shall not operate as, or be construed to be, a waiver of any subsequent breach of the same provision by any party or of the breach of any other term or provision of this Annex A. The delay or a failure of a party to transmit any written notice hereunder shall not constitute a waiver by such party of any default hereunder or of any other or further default under this Annex A except as may expressly be provided for by the terms of this Annex A. 11.11 Tax Allocation. The allocation of the Purchase Price for tax purposes shall be made in a manner reasonable determined by Lessor and disclosed to Lessee in writing prior to the Closing. Such allocation shall be set forth in a statement prepared in accordance with Section 1060 of the Internal Revenue Code of 1986, as amended, which statement shall be prepared in a manner generally consistent with the form of Internal Revenue Service Form 8594. Lessee and Lessor shall cooperate in the preparation of such statement of allocation and each party hereto shall file a copy of such statement as required by applicable law. 11.12 Interpretation. Each of the parties has agreed to the use of the particular language of the provisions of this Annex A including all attached Appendices and Schedules, and any questions of doubtful interpretation shall not be resolved by any rule or interpretation against the draftsman but rather in accordance with the fair meaning thereof, having due regard to the benefits and rights intended to be conferred upon the parties hereto and the limitations and restrictions upon such rights and benefits intended to be provided. 11.13 Notice. Any notice, demand or communication required, permitted, or desired to be given hereunder shall be in writing and shall be deemed effectively given when personally delivered or mailed by prepaid certified mail, return receipt requested, addressed as follows: Lessor: Board of Trustees Needles Desert Communities Hospital Needles, California 92363 Attention: Chairman with a copy to: City of Needles, California 817 Third Street Needles, California 92363 Attention: City Attorney 36 95 and Best Best & Krieger LLP 3750 University Avenue, Suite 400 Riverside, California 92502-1028 Attention: George M. Reyes, Esq. Lessee: Principal-Needles, Inc. 109 Westpark Drive, Suite 180 Brentwood, Tennessee 37027 Attention: Chief Executive Officer with a copy to: Waller Lansden Dortch & Davis, A Professional Limited Liability Company Nashville City Center 511 Union Street, Suite 2100 Nashville, Tennessee 37219 Attention: Franklin A. Berryman, Esq. or to such other address, and to the attention of such other person or officer as any party may designate, with copies thereof to the respective counsel thereof as notified by such party. 11.14 Severability. In the event any provision of this Annex A is held to be invalid, illegal or unenforceable for any reason and in any respect, such invalidity, illegality, or unenforceability shall in no event affect, prejudice or disturb the validity of the remainder of this Annex A, which shall be in full force and effect, enforceable in accordance with its terms, including, without limitation, those terms which contemplate or require the further agreements of the parties. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as a part of this Annex A provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and still be legal, valid or enforceable. 11.15 Gender and Number. Whenever the context of this Annex A requires, the gender of all words herein shall include the masculine, feminine and neuter, and the number of all words herein shall include the singular and plural. 11.16 Divisions and Headings. The divisions of this Annex A into sections and subsections and the use of captions and headings in connection therewith are solely for convenience and shall have no legal effect in construing the provisions of this Annex A. 37 96 11.17 Consented Assignment. Anything contained herein to the contrary notwithstanding, this Annex A shall not constitute an agreement to assign any claim, right, contract, license, lease, commitment, sales order or purchase order if an attempted assignment thereof without the consent of another party thereto would constitute a breach thereof or in any material way affect the rights of Lessor thereunder, unless such consent is obtained. If such consent is not obtained, or if an attempted assignment would be ineffective or would materially affect Lessor's rights thereunder so that Lessee would not in fact receive all such rights, Lessor shall cooperate in any reasonable arrangement designed to provide for Lessee the benefit under any such claims, rights, contracts, licenses, leases, commitments, sales orders or purchase orders, including, without limitation, enforcement, at no out-of-pocket cost to Lessor, of any and all rights of Lessor against the other party or parties thereto arising out of the breach or cancellation by such other party or otherwise. 11.18 Survival. All statements made by the parties hereto herein or in the Schedules or in any other financial statement, document, instrument, certificate, exhibit or list delivered to each other hereunder by or on behalf of parties hereto shall be deemed representations and warranties of the parties hereto regardless of any investigation made by or on behalf of Lessee. Furthermore, the representations, warranties, covenants and agreements made by the parties in this Annex A shall survive the Closing for a period of five (5) years, except for the representations and warranties of Lessor set forth in Section 3.7 which shall survive indefinitely. 11.19 Entire Agreement; Amendment. This Annex A supersedes all prior contracts, understandings and agreements, whether written or oral, and constitutes the entire agreement of the parties respecting the within subject matter and no party shall be entitled to benefits other than those specified herein. As between or among the parties, no oral statements or prior written material not specifically included herein shall be of any force and effect; the parties specifically acknowledge that in entering into and executing this Annex A, the parties rely solely upon the representations and agreements contained in this Annex A and no others. No terms, conditions, warranties, or representations, other than those contained herein and no amendments or modifications hereto, shall be binding unless made in writing and signed by the party to be charged. 11.20 Counterparts. This Annex A may be executed in multiple originals or counterparts, each and all of which shall be deemed an original and all of which together shall constitute but one and the same instrument. 11.21 Risk of Loss. Notwithstanding any other provision hereof to the contrary, the risk of loss in respect of casualty to the Assets shall be borne by Lessor through the time of Closing and by the Lessee thereafter. 11.22 Due Diligence. The parties acknowledge and agree that they have executed this Annex A (i) prior to Lessee having completed its due diligence with respect to the transactions described in this Annex A, and (ii) without there being attached hereto all of 38 97 the Schedules required by this Lease, or, in the case where a Schedule has been attached, it may not contain all of the information required to make it complete. Lessor shall provide full and complete Schedules on or before July 24, 1997, and may amend or supplement any theretofore submitted Schedules on or before such date. Such finally submitted complete Schedules submitted on or before July 24, 1997, shall be deemed part of this Lease and incorporated herein as of the date hereof as if originally submitted to Lessee and attached hereto as of the date hereof. Lessee shall have until July 31, 1997 (the "Due Diligence Period") to review the Schedules and complete its due diligence. The Due Diligence Period may be modified by mutual written agreement of Lessor and Lessee, and shall be extended a reasonable period of time to allow Lessee to consider and conduct due diligence with respect to the Schedules. Notwithstanding the foregoing, if for any reason in its sole discretion, Lessee is dissatisfied with the result of its due diligence, whether it relates to the Schedules or otherwise, Lessee may terminate this Annex A and the Lease, and thereafter this Annex A and the Lease, and the rights and obligations of the parties under this Annex A and the Lease shall be null and void. 11.23 Loan of Operating Funds. Between the date of the execution of this Annex A and the Closing Date, Lessee shall loan to Lessor the amount of any cash flow shortfall related to the operation of the Hospital. Each advance shall be evidenced by a promissory note, bearing interest at the variable rate of the Prime Rate as published from time to time in the Money Rates section of the Wall Street Journal, payable in four equal installments of principal plus accrued interest thereon commencing on the fifteenth (15th) day of the month following the month of Closing, and secured by a first priority security interest in all of Lessor's accounts receivable relating to the Business. 11.24 Payment of Additional Amount. Lessee shall pay Lessor an additional $100,000 at Closing. Such amount shall be used by Lessor to pay a portion of the obligations of Lessor to Leon Berger pursuant to his severance arrangements with Lessor. 11.25 Confirmation of Financial Ability to Perform. Lessee shall provide Lessor on or before the execution of this Annex A with a letter from the private equity firm of Golder, Thoma, Cressey, Rauner, Inc. confirming Lessee's financial ability to consummate the transactions described herein. 11.26 Guaranty by Principal Hospital Company. Lessee shall cause Principal Hospital Company to guaranty Lessee's obligations under the Lease and this Annex A pursuant to that certain Guaranty substantially in the form attached hereto as Appendix 11.26. 11.27 Fair Market Value Opinion. The parties acknowledge and agree that Lessor has executed this Annex A prior to receiving a written fair market value opinion from Arthur Anderson LLP covering the transactions contemplated by this Annex A and the Lease. Notwithstanding any other provision in this Annex A and the Lease, if, for any reason in its sole discretion, Lessor is dissatisfied with the written fair market value opinion obtained from Arthur Anderson LLP, then Lessor may terminate this Annex A and the Lease, and, 39 98 thereafter, this Annex A and the Lease, and the rights and obligations of the paries under this Annex A and the Lease, shall be null and void. 11.28 Hill-Burton Obligations. In the event that any obligation or liability is asserted, or any action is brought, against either Lessor or Lessee under the federal Hill-Burton program or other restricted grant and loan programs arising out of the ownership and operation of the Hospital by Lessor prior to the Closing or with respect to the consummation of the transactions contemplated by the Lease and this Annex A, Lessor and Lessee shall cooperate in good faith with one another to defend against such assertion or action. IN WITNESS WHEREOF, the parties hereto have caused this Annex A to be executed in multiple originals by their duly authorized officers and their corporate or official seals duly affixed hereto, all as of the day and year first above written. PRINCIPAL-NEEDLES, INC. By: /s/ Christine A. Craft ---------------------------------- Name: Christine A. Craft ----------------------------- Title: Vice President, Acquisitions and Development ---------------------------- THE BOARD OF TRUSTEES OF NEEDLES DESERT COMMUNITIES HOSPITAL By: /s/ Evelyn R. Connelly ---------------------------------- Name: Evelyn R. Connelly ----------------------------- Title: President ---------------------------- APPROVED BY AND AGREED TO: THE CITY COUNCIL OF THE CITY OF NEEDLES, CALIFORNIA By: /s/ Murl L. Shaver ------------------------------ Name: Murl L. Shaver ------------------------ Title: Mayor ----------------------- APPROVED AS TO FORM BY THE CITY ATTORNEY FOR THE CITY OF NEEDLES, CALIFORNIA By: /s/ Robert Hargreaver ------------------------------ Name: Robert Hargreaver ------------------------ Title: City Attorney ----------------------- 40 99 SCHEDULES 1.2(a) Licenses 1.3(a) Contracts 1.3(b) Prepaid Expenses 4.3 Financial Statements 4.4 Licenses 4.5 Certain Contracts 4.6 Certain Leases 4.7(a) Permitted Encumbrances 4.7(b) Title Policies 4.7(c) Structural Defects 4.7(d) Rental and Lease Payments 4.7(e) UCC Searches 4.8 Employee Benefits Plans 4.9 Litigation 4.10 Insurance Policies 4.11 Post-Balance Sheet Results 4.12 Lessor's Employees 4.14 JCAHO Accreditation 4.18 Undisclosed Liabilities 6.3 Certain Changes APPENDICES 1.6(a) Form of Assignment and Assumption 2.2(ii) Form of Bill of Sale 3.6 Hospital Board Bylaws 3.11 Indigent Care Policy 11.27 Form of Guaranty v EX-10.23 18 PURCHASE AND SALE AGREEMENT DATED 11-25-96 1 Exhibit 10.23 PURCHASE AND SALE AGREEMENT THIS AGREEMENT is made and entered into as of the 25th day of November, 1996 by and between Brim, Inc. ("Brim"), an Oregon corporation, Brim Senior Living, Inc. ("BSL"), an Oregon corporation and Brim Pavilion, Inc., an Oregon corporation ("BPI") (collectively "Seller") and Plaza Enterprises, L.L.C., a Nevada limited liability company ("Purchaser"). RECITALS A. Seller is the owner of certain rights and interests related to three medical office buildings in Portland, Oregon, Scottsdale, Arizona and Los Angeles, California. B. Seller is interested in selling those rights and interests and Purchaser is interested in acquiring the same. C. Seller and Purchaser are interested in documenting the terms and conditions under which said purchase and sale shall occur. NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants of the parties set forth herein, IT IS HEREBY AGREED AS FOLLOWS: AGREEMENT PURCHASE AND SALE. 1. On the terms and subject to the conditions set forth herein, Seller shall sell, assign, transfer and convey to Purchaser and Purchaser shall purchase and accept the following assets: a. All of Seller BPI's right, title and interest in and to its general partnership interest (the "Pavilion Partnership Interest") in Physician's Pavilion Partners Limited Partnership, an Oregon limited partnership (the "Pavilion Partnership"); b. All of Seller BPI's right, title and interest in and to its general partnership interest (the "Scottsdale Partnership Interest") in Scottsdale Limited Partnership, an Oregon limited partnership (the "Scottsdale Partnership"); c. All of Seller BSL's right, title and interest in and to that Lease of Real Property and Lease-Back of Real Property Agreement dated November 28, 1989 between BSL and the County of Los Angeles (the "MLK Lease") with respect to the real property located in Los Angeles, California and more particularly described in Exhibit A (the "MLK Real Property") and all of BSL's right, title and interest in (i) the fixtures and improvements located on the MLK Real Property including that two story, 10,250 square foot medical office building known as the MLK Medical Office Building (collectively the "MLK MOB"), and (ii) any and 1 2 all security deposits, pre-paid rents or other similar sums paid to and/or being held by Seller in connection therewith (the "MOB Cash") (Seller's right, title and interest in the MLK Lease and the MLK MOB are collectively referred to as the "MLK Interests"). d. All of Seller Brim's right, title and interest in and to that Medical Office Building Management Agreement dated December 1, 1993 between Physicians Pavilion Partners Limited Partnership and Brim, as successor in interest by merger to Brim Enterprises, Inc. (the "Pavilion Management Agreement"). e. All of Seller Brim's right, title and interest in and to that Medical Office Building Management Agreement dated December 26, 1991 between Scottsdale Limited Partnership and Brim, as successor in interest by merger to Brim Enterprises, Inc. (the "Scottsdale Management Agreement"). Hereinafter the foregoing shall sometimes be collectively referred to as "Seller's Assets." PURCHASE PRICE 2. The purchase price payable by Purchaser to Seller for Seller's Assets shall be equal to the sum of (i) Four Hundred Six Thousand Five Hundred and no/100 Dollars ($406,500.00) and (ii) the outstanding principal balance due under that Promissory Note dated November 20, 1990 executed by BSL in favor of US National Bank of Oregon and any and all documents executed in conjunction therewith (the "MLK Loan Documents"), a true and correct copy of which are attached hereto as Exhibit B. The purchase price shall be payable by the delivery of immediately available funds at Closing in the amount of $406,500 as the same may be adjusted by the net costs and prorations provided for in Paragraph 5 and reduced by the amount of the MOB Cash, if any and (iii) the assumption at Closing of the MLK Loan Documents. The cash portion of the purchase price shall be allocated among the Seller's Assets as follows: Pavilion Partnership Interest $347,000 Scottsdale Partnership Interest $ 2,499 MLK Real Property, MLK MOB, MLK Lease $ 57,000 (plus assumption of the debt evidenced by the MLK cost documents) Management Agreements $ 1
In the event that prior to the Closing Date, a material portion of the MLK Real Property or the MLK MOB shall have been damaged or destroyed by fire or other casualty, or shall have been taken or condemned by any public or quasi-public authority under the power of eminent domain, Purchaser shall not have the right to terminate but the purchase price due at Closing which is allocable to the MLK Interests (calculated by reference to the cash portion of the purchase price associated thereto and the then outstanding principal balance due under the MLK Loan Documents) shall be reduced by such amount as is fair and equitable in light of the nature of such damage or 2 3 destruction and Seller shall assign to Purchaser all of its rights to any insurance proceeds or condemnation award and all claims in connection therewith. CLOSING 3. Provided all of the conditions to closing set forth in Paragraphs 13 and 14 have been satisfied or waived, the Closing of the purchase and sale under this Agreement (the "Closing") shall take place on the date on which the closing of the Other Brim Transactions (as defined below) occurs (the "Closing Date"). Closing shall occur at the offices of Seller or at such other place as Purchaser and Seller may mutually agree. Time is of the essence hereto. CONVEYANCE 4. Conveyance of the Seller's Assets to Purchaser shall be effected by (i) an Assignment and Assumption Agreement in the form attached hereto as Exhibit C, duly executed by Seller BPI in the case of the Pavilion Partnership Interest and the Scottsdale Partnership Interest and (ii) an Assignment and Assumption Agreement and Bill of Sale in the form attached hereto as Exhibit D, duly executed by Seller BSL in the case of the Pavilion Management Agreement, the Scottsdale Management Agreement, and the MLK Interests and (iii) an Assignment and Assumption Agreement and Bill of Sale in the form attached hereto as Exhibit E, duly executed by Seller Brim in the case of the Pavilion Management Agreement and the Scottsdale Management Agreement (collectively, the "Conveyancing Documents"). Title to the MLK Interests, the Pavilion Partnership Interest and the Scottsdale Partnership Interest shall be conveyed from Seller to Purchaser free and clear of all liens, charges, easements and encumbrances of any kind, and on and as of the Closing Date, the MLK Real Property, the MLK MOB, the Pavilion Real Property and Improvements (as hereinafter defined) and the Scottsdale Real Property and the Scottsdale Improvements (as hereinafter defined) shall each be vested in the fee owner thereof free and clear of all liens, charges, easements and encumbrances of any kind other than the following (the "Permitted Encumbrances"): a. A lien for real estate taxes that are not yet due and payable; b. Such items of record as would be reflected in a title report prepared with respect to the MLK Real Property, the Pavilion Real Property and the Scottsdale Real Property; c. The effect of laws, ordinances and governmental regulations binding thereon, including, but not limited to, all applicable building, zoning, land use and environmental ordinances and regulations affecting such real property interests; d. The MLK Lease, the MLK Subleases, the Airspace Lease, the Master Lease, the Pavilion Subleases and the Scottsdale Leases (as such terms are hereinafter defined); and e. Any Liens evidencing, or securing the obligations under, the MLK Loan Documents. 3 4 COSTS, PRORATIONS AND ADJUSTMENTS 5. The costs of the transaction and the expenses related to the ownership and operation of the Seller's Assets shall be allocated between Seller and Purchaser as follows: a. Seller shall pay any transfer or documentary stamp or excise tax due on the recording of the assignment and transfer of the MLK Interests and the quitclaim deed referenced in Paragraph 4. b. All revenues which can be identified as of the Closing Date, which relate to the period prior to the Closing Date and which have not been collected by Seller as of the Closing Date, including but not limited to rent due from Los Angeles County under the MLK Lease and distributions due to Seller BPI with respect to the Pavilion Partnership Interest and the Scottsdale Partnership Interest (the "Pre-Closing Revenues") and all expenses which can be identified as of the Closing Date, which relate to the period prior to the Closing Date and which have not been paid as of the Closing Date, including principal and interest due under the MLK Loan Documents (the "Pre-Closing Expenses") related to the ownership or operation of the Seller's Assets shall be the property and/or responsibility of Seller; provided, however, that the net amount thereof shall serve to increase or decrease the cash portion of the purchase price due from Purchaser to Seller at Closing, after which Purchaser shall be entitled to retain all such Pre-Closing Revenues when collected after Closing and shall be obligated to pay all such Pre-Closing Expenses after Closing. c. If and to the extent Seller BSL is responsible therefor under the terms of the MLK Lease and the amount thereof can be identified at Closing, real and personal Property taxes with respect to the MLK Real Property and/or the MLK MOB shall be prorated as of the Closing Date, with Seller BSL responsible therefor for the period prior to the Closing Date; provided, however, that the net amount thereof shall serve to increase or decrease the cash portion of the purchase price due from Purchaser to Seller at Closing, after which Purchaser shall be obligated to pay all such taxes as and when the same come due after Closing. d. If and to the extent Seller BSL is responsible therefor under the terms of the MLK Lease, Seller BSL shall arrange for a final statement with respect to all utilities serving the MLK Real Property and the MLK MOB as of the Closing Date and shall pay all fees identified thereon and Purchaser shall arrange for all such utilities to be billed in its name from and after the Closing Date and shall pay all fees due therefor as of the Closing Date. e. Purchaser and Seller shall each pay their own attorney's fees. f. Purchaser and Seller shall share any escrow fees on a 50-50 basis. g. Purchaser shall pay any and all costs, fees and expenses related to its assumption of the MLK Loan Documents. 4 5 h. Purchaser shall be responsible for all of the expenses related to the ownership and operation of the Seller's Assets from and after the Closing Date, including any expenses which relate to the period prior to the Closing Date whether or not included in the Pre-Closing Expenses for which Purchaser receives a credit at Closing. POSSESSION 6. At Closing, Purchaser shall be entitled: a. To exercise and enjoy all of the rights and privileges appurtenant to or arising from the Pavilion Partnership Interest and the Scottsdale Partnership Interest including, without limitation, the right to receive distributions, the right to manage the applicable partnership as the general partner thereof, and the right to vote as a partner in the applicable partnership on matters submitted to partnership vote or consent; b. To exercise and enjoy all of the rights and privileges of the "Developer" under the MLK Lease; c. To exercise and enjoy all of the rights and privileges of the "Manager" under the Pavilion Management Agreement and the Scottsdale Management Agreement; and d. To possession of the MLK MOB. In each case subject to the rights and/or obligations of the other party or parties to, as applicable, the Agreement of the Scottsdale Limited Partnership Agreement dated December 26, 1991 (the "Scottsdale Partnership Agreement"), the First Amended and Restated Agreement of Limited Partners of the Physicians' Pavilion Partners Limited Partnership dated November 25, 1992 (the "Pavilion Partnership Agreement"), the MLK Lease, the Pavilion Management Agreement and the Scottsdale Management Agreement, the MLK Subleases, the Pavilion Subleases and the Scottsdale Leases. REPRESENTATIONS AND WARRANTIES 7. Each of Brim, BPI and BSL hereby warrants and represents to Purchaser with respect to itself but not with respect to the other entity comprising Seller that: a. Status of Seller. It is a corporation duly organized, validly existing and in good standing under the laws of the State of Oregon and is duly qualified to do business in the States of Arizona and California to the extent such qualification is required in connection with its ownership of that portion of the Seller's Assets pertaining to real or personal property located in such states. 5 6 b. Seller's Authority. It has full power and authority to execute and to deliver this Agreement and all related documents, and to carry out the transaction contemplated herein. This Agreement is valid, binding and enforceable against each of Brim, BPI and BSL in accordance with its terms, except as such enforceability may be limited by creditors' rights laws and applicable principles of equity. The execution of this Agreement and the consummation of the transaction contemplated herein do not result in a breach of the terms and conditions of nor constitute a default under or violation of its charter or any law, regulation, court order, mortgage, note, bond, indenture, agreement, license or other instrument or obligation to which it is now a party or by which it or any of its assets may be bound or affected. c. Title. With respect to the title of the Seller's to the Seller's Assets the Seller's represent as follows: A. Seller BPI represent that: (i) BPI has good and marketable title to the Pavilion Partnership Interest and the Scottsdale Partnership Interest free and clear of all liens and encumbrances. (ii) The Pavilion Partnership has a valid, enforceable and insurable leasehold interest in the airspace above the Pavilion Real Property under and pursuant to that certain Airspace Lease, free and clear of all liens or encumbrances other than the Master Lease, those certain subleases listed in Exhibit F to this Agreement (the "Pavilion Subleases"), and the other liens and encumbrances permitted by the terms hereof; (iii) The Airspace Lease, in the form attached to this Agreement as Exhibit G, is in full force and effect and unmodified, and no event or circumstance exists or has occurred that, with notice, the passage of time, or both, would constitute a default under the Airspace Lease by either OHSU or the Pavilion Partnership; (iv) The Pavilion Partnership has good, marketable and insurable fee title to the Pavilion Improvements, and the Pavilion Partnership owns, or has a valid and enforceable right to use, all of the other properties and assets occupied by, used in or necessary to the conduct of the Pavilion Partnership's business, in each case free and clear of all liens and encumbrances other than the Master Lease, the Pavilion Subleases and those other liens and encumbrances permitted by the terms hereof; (v) The Master Lease and each of the Pavilion Subleases, in the form delivered to Purchaser before the date of the Agreement, is in full force and effect and unmodified, and no event or circumstance exists or has occurred that, with notice, the passage of time, or both, would constitute a default under either the Master Lease or 6 7 any such Pavilion Subleases by either Pavilion Partnership, OHSU or the physician subtenant thereunder; (vi) With respect to the loan to the Pavilion Partnership and secured, among other things, by the Airspace Lease and the Pavilion Improvements, no event or circumstance exists or has occurred that, with notice, the passage of time, or both, would constitute a default under any document or instrument evidencing or securing such loan; (vii) Neither the Pavilion Partnership nor any real or personal asset that it owns is currently in default or violation of any regulation, court order, mortgage, note, bond, indenture, agreement, license or other instrument or obligation to which it or such assets are a party or are bound or affected; (viii) The Scottsdale Partnership has good, marketable, insurable fee simple title to the Scottsdale Real Property and Improvements, and the Scottsdale Partnership owns, or has a valid and enforceable right to use, all of the other properties and assets occupied by, used in or necessary to the conduct of the Scottsdale Partnership's business, in each case free and clear of all liens and encumbrances other than those certain physician leases listed in Exhibit H to this Agreement (the "Scottsdale Leases"), and the other liens and encumbrances permitted by the terms hereof; (ix) Each of the Scottsdale Leases is in full force and effect and unmodified, and no event or circumstance exists or has occurred that, with notice, the passage of time, or both, would constitute a default under any Scottsdale Leases by either the Scottsdale Partnership or a physician tenant thereunder; (x) With respect to the loan to the Scottsdale Partnership and secured, among other things, by the Scottsdale Real Property and Improvements, no event or circumstance exists or has occurred that, with notice, the passage of time, or both would constitute a default under any document or instrument evidencing or securing such loan; (xi) Neither the Scottsdale Partnership nor any real or personal asset that it owns is currently in default or violation of any regulation, court order, mortgage, note, bond, indenture, agreement, license or other instrument or obligation to which it or such assets are a party or are bound or affected; B. Seller BSL represents that: (i) BSL has a valid, enforceable and insurable leasehold interest in the MLK Real Property under and pursuant to the MLK Lease, free and clear of all liens or encumbrances other than those certain physician subleases listed in Exhibit I to this 7 8 Agreement (the "MLK Subleases"), and the other liens and encumbrances permitted by the terms hereof; (ii) The MLK Lease, in the form attached to this Agreement as Exhibit J, is in full force and effect and unmodified, and that no event or circumstance exists or has occurred that, with notice, the passage of time, or both, would constitute a default under the MLK Lease by either the County of Los Angeles or BSL; (iii) BSL has good, marketable and insurable fee title to the MLK MOB, and BSL owns, or has a valid and enforceable right to use, all of the other properties and assets occupied by, used in or necessary to the conduct of its business at the MLK MOB, in each case free and clear of all liens and encumbrances other than the MLK Subleases and those other liens and encumbrances permitted by the terms hereof; (iv) Each of the MLK Subleases is in full force and effect and unmodified, and that no event or circumstance exists or has occurred that, with notice, the passage of time, or both, would constitute a default under any such MLK Subleases by either BSL or the physician subtenant thereunder. (v) Neither BSL nor any real or personal asset that it owns in connection with the business conducted at the MLK MOB is currently in default or violation of any regulation, court order, mortgage, note, bond, indenture, agreement, license or other instrument or obligation to which it or such assets are a party or are bound or affected; C. Seller's Brim represents that each of the Pavilion Management Agreement and the Scottsdale Management Agreement, in the forms delivered to Purchaser before the date of this Agreement, is in full force and effect and unmodified, and that no event or circumstance exists or has occurred that, with notice, the passage of time, or both, would constitute a default under either such agreement by either party thereto. As used in this Paragraph 7(c) and elsewhere in this Agreement, the following terms shall have the following meanings: Scottsdale Real Property means that certain real property owned by the Scottsdale Partnership and more particularly described in Exhibit K. Scottsdale Improvements means all the fixtures and improvements on the Scottsdale Real Property. OHSU means Oregon Health Sciences University. 8 9 Pavilion Real Property means that certain real property owned by OHSU and more particularly described in Exhibit L. Airspace Lease means that certain Air Rights Lease between the Pavilion Partnership and OHSU dated November 25, 1992, pursuant to which Pavilion Partnership has the right to use, and has constructed the Pavilion Improvements in a portion of, the airspace above the Pavilion Real Property. Pavilion Improvements means all of the improvements constructed and owned by the Pavilion Partnership pursuant to the Airspace Lease. Master Lease means that certain Master Lease between OHSU and the Pavilion Partnership dated December 12, 1991, under which OHSU leases space in the Pavilion Improvements. d. Necessary Action. It will proceed with all due diligence to take all action and obtain all consents prior to Closing necessary for it to lawfully enter into and carry out the terms of this Agreement. e. Taxes and Tax Returns. All tax returns, reports and filings of any kind or nature required to be filed by it prior to Closing with respect to its ownership and/or operation of the portion of the Seller's Assets owned and/or operated by it or required to be filed prior to Closing by the Scottsdale Partnership or the Pavilion Partnership have been properly completed and timely filed in material compliance with all applicable requirements and all taxes or other obligations which are due and payable by it have been timely paid. f. Litigation. There is no litigation, investigation, or other proceeding pending or, to the best of its knowledge, threatened against or relating to it, its properties or business, or the properties or business of the Scottsdale Partnership or the Pavilion Partnership which litigation, investigation or proceeding could have a material adverse effect on the value of the Seller's Assets, or which would prevent it from performing its obligations hereunder, and the transaction contemplated herein has not been challenged by any governmental agency or any other person, nor does it know or have reasonable grounds to know, of any basis for any such litigation, investigation or other proceeding. For purposes hereof, litigation, an investigation or other proceeding shall be deemed to be pending if the same has been served on it or it has otherwise been advised either orally or in writing of the pendency thereof. g. Books and Records. All of the books and records maintained by it with respect to its ownership and/or operation of the portion of the Seller's Assets owned by it are true and correct in all material respects. h. The MLK Loan Documents. Seller BSL represents that attached hereto as Exhibit B is a true and correct copy of the MLK Loan Documents. Seller BSL further represents that 9 10 the MLK Loan Documents are in full force and effect and have not been modified or amended except as set forth in Exhibit B. Seller BSL has no knowledge or notice that it is in default of any of its obligations under the MLK Loan Documents nor is it aware of any default or any action which, with the passage of time or the giving of notice or both would constitute such a default. Seller BSL represents and warrants that the MLK Real Property, the MLK MOB, and the MLK Lease have collectively been accounted for on its books and records under generally accepted accounting principles as a contract receivable. i. Environmental Matters. Except in accordance with, and in full compliance with, any and all applicable governmental laws, regulations and requirements (collectively, the "Environmental Laws") relating to environmental and occupational health and safety matters and hazardous materials, substances or wastes (as defined from time to time under any applicable federal, state or local laws, regulations or ordinances), (A) Seller BSL has not released into the environment, or discharged, placed or disposed of any such hazardous materials, substances or wastes or caused the same to be so released into the environment or discharged, placed or disposed of at, on or under the MLK Real Property or the MLK MOB, Seller BSL has not installed any underground storage tanks on the MLK Real Property and Seller BSL has not used the MLK Real Property as a dump for waste material and (B) Seller BPI has not released nor has the Scottsdale Partnership or the Pavilion Partnership released into the environment, or discharged, placed or disposed of any such hazardous materials, substances or wastes or caused the same to be so released into the environment or discharged, placed or disposed of at, in or under the Pavilion Real Property or the Scottsdale Real Property, respectively, Seller BPI has not installed any underground storage tanks on the Pavilion Real Property or the Scottsdale Real Property, respectively, and neither Seller BPI, the Scottsdale Partnership nor the Pavilion Partnership has used the Scottsdale Real Property or the Pavilion Real Property respectively as a dump for waste material. To the best of Seller BSL's knowledge without a Phase I Assessment of the MLK Real Property having been conducted by Seller BSL, and to the best of Seller BPI's knowledge without a Phase I Assessment of the Pavilion Real Property or the Scottsdale Real Property having been conducted, (A) no hazardous materials, substances or wastes are located on the MLK Real Property or the MLK MOB or the Pavilion Real Property or the Scottsdale Real Property, respectively or have been released by Seller BSL or Seller BPI into the environment or discharged, placed or disposed of in, on or under the MLK Real Property or the MLK MOB or the Pavilion Real Property or the Scottsdale Real Property by Seller BSL or Seller BPI, respectively; no underground storage tanks are located on the MLK Real Property or the Pavilion Real Property or the Scottsdale Real Property, respectively; the MLK Real Property has never been used by Seller BSL as a dump for waste material and the MLK Real Property and the MLK MOB and the prior uses of the MLK Real Property and the MLK MOB by Seller BSL and the Pavilion Real Property and the Scottsdale Real Property and all prior uses thereof by Seller BPI or by the Pavilion Partnership or the Scottsdale Partnership, respectively at all times complied with all Environmental Laws. Nothing herein shall be construed as a representation or warranty by Seller BSL with respect to any compliance or non-compliance by Los Angeles County with respect to its use of and operations at the MLK 10 11 Real Property and the MLK MOB or by Seller BPI with respect to any compliance or non-compliance by any of the tenants under the Pavilion Subleases or the Scottsdale Leases. j. Compliance with Law. With respect to the compliance of Seller's Assets with applicable law, the Sellers represent as follows: A. Seller BSL represents that: (i) The MLK Real Property and the MLK MOB are in compliance with all currently applicable municipal, county, state and federal laws, regulations, ordinances, standards and orders and with all municipal, health, building and zoning by-laws and regulations (including, without limitation, the building and zoning codes) where the failure to comply therewith or to obtain a waiver therefrom could have a material adverse effect on the business, property, condition (financial or otherwise) or operation thereof; (ii) There are no outstanding deficiencies or work orders of any authority having jurisdiction over the MLK Real Property or the MLK MOB requiring conformity to any applicable statute, regulation, ordinance or by-law pertaining thereto; and (iii) It is not aware of any claim, requirement or demand of any agency supervising or having authority over the MLK MOB to rework or redesign it or to provide additional furniture, fixtures or equipment so as to conform to or comply with any existing law, code or standard which has not been fully satisfied prior to the date hereof or which will not be satisfied prior to the Closing Date. B. Seller BPI represents that: (i) The Pavilion Property and the Scottsdale Property are in compliance with all currently applicable municipal, county, state and federal laws, regulations, ordinances, standards and orders and with all municipal, health, building and zoning by-laws and regulations (including, without limitation, the building and zoning codes) where the failure to comply therewith or to obtain a waiver therefrom could have a material adverse effect on the business, property, condition (financial or otherwise) or operation thereof; (ii) There are no outstanding deficiencies or work orders of any authority having jurisdiction over the Pavilion Property or the Scottsdale Property requiring conformity to any applicable statute, regulation, ordinance or by-law pertaining thereto; and (iii) It is not aware of any claim, requirement or demand of any agency supervising or having authority over the Scottsdale Property to rework or redesign 11 12 it or to provide additional furniture, fixtures or equipment so as to conform to or comply with any existing law, code or standard which has not been fully satisfied prior to the date hereof or which will not be satisfied prior to the Closing Date. The representations and warranties of Seller in this Paragraph 7 shall be true and correct in all respects, are made by Seller both as of the date hereof and as of the date of Closing. 8. Purchaser hereby warrants and represents to Seller that: a. Status of Purchaser. Purchaser is a limited liability company duly organized and validly existing under the laws of the state of Nevada and is in existence or good standing (as applicable) under the laws thereof and is or prior to Closing will be duly qualified to do business in the States of Oregon, Arizona and California if such qualification is necessary for Purchaser to lawfully acquire the Seller's Assets or otherwise carry out its obligations under this Agreement. b. Authority. Purchaser has full power and authority to execute and to deliver this Agreement and all related documents, and to carry out the transactions contemplated herein. This Agreement is valid, binding and enforceable as against Purchaser in accordance with its terms, except as such enforceability may be limited by creditors' rights laws and applicable principles of equity. The execution of this Agreement and the consummation of the transaction contemplated herein do not result in a breach of the terms and conditions of nor constitute a default under or violation of Purchaser's Certificate of Formation or Operating Agreement or any law, regulations, court order, mortgage, note, bond, indenture, agreement, license or other instrument or obligation to which Purchaser is a party or by which Purchaser or any of the assets or Purchaser may be bound or affected. c. Litigation. There is no litigation, investigation or other proceeding pending or, to the best of Purchaser's knowledge, threatened against or relating to Purchaser, its properties or business which is material to this Agreement, or which would prevent Purchaser from performing its obligations hereunder, nor does Purchaser know or have reasonable grounds to know of any basis for any such action. For purposes hereof, litigation, an investigation or a proceeding shall be deemed to be pending if the same has been served on Purchaser or Purchaser has been advised either orally or in writing of the pendency thereof. d. Necessary Action. Purchaser will proceed with all due diligence to take all action and obtain all consents prior to Closing necessary for it to lawfully enter into and carry out the terms of this Agreement. 9. BROKER Each party hereby represents and warrants to the other party that it has not contacted or entered into any agreement with any real estate broker, agent, finder, or any other party in connection 12 13 with this transaction and that it has not taken any action which would result in any real estate broker's, finder or other fees or commissions being due and payable to any other party with respect to the transaction contemplated by this Agreement. Each party hereby indemnifies and agrees to hold the other party harmless from any loss, liability, damage, cost, or expense (including reasonable attorney's fees) resulting to the other party by reason of a breach of the representation and warranty made by the indemnifying party in this paragraph. Notwithstanding anything to the contrary contained in this Agreement, the indemnity set forth in this paragraph and any sums due pursuant to such indemnity shall constitute separate agreements in causes of action in addition to any liquidated damages provided for in this Agreement. COVENANTS 10. Seller. Each of Brim, BPI and BSL covenants on its own behalf and not on behalf of the other entity for the benefit of Purchaser as follows: a. Pre-Closing. Between the date hereof and the Closing Date, except as contemplated by this Agreement or with the consent of Purchaser: i. Other than as set forth in Paragraph 4 it will satisfy and discharge or cause to be satisfied and discharged all claims, liens, security interests, tenancies and encumbrances on Seller's Assets owned by it and on the Pavilion Real Property, the Pavilion Improvements, the Scottsdale Real Property and the Scottsdale Improvements (other than the Permitted Encumbrances); ii. It will file and/or cause the Pavilion Partnership and the Scottsdale Partnership to file all tax returns, reports and filings of any kind or nature required to be filed by it or by such Partnership and will timely pay all taxes or other obligations which are due and payable by it with respect to the portion of the Seller's Assets owned by it; iii. It will not take or permit to be taken any action inconsistent with its obligations under this Agreement or which could hinder or delay the consummation of the transactions contemplated by this Agreement, and, in the case of Seller BSL, it will continue until the Closing to fulfill any obligations which it may have under the MLK Lease, the MLK Subleases, the Scottsdale Management Agreement or the Pavilion Management Agreement and, in the case of Seller BPI, it will continue until Closing to fulfill any obligations which it may have as the general partner of the Scottsdale Partnership and the Pavilion Partnership and will cause each such Partnership to continue until the Closing to fulfill any obligations which it may have under the Airspace Lease, the Master Lease, the Pavilion Subleases and the Scottsdale Leases; iv. In the case of Seller BSL, it will maintain in force the existing hazard and liability insurance policies, or comparable coverage, for the MLK Real Property and the MLK MOB as now in effect; and, in the case of Seller BPI, it will cause the Pavilion Partnership and the 13 14 Scottsdale Partnership to maintain in force the existing hazard and liability insurance policies, or comparable coverage, for the Pavilion Real Property and Improvements and the Scottsdale Real Property and Improvements (by, if applicable, requiring performance by the Manager under the Pavilion Management Agreement and the Scottsdale Management Agreement). v. It will not enter into, or, if applicable, cause or permit the Pavilion Partnership or the Scottsdale Partnership to enter into, any contract or commitment affecting the portion of the Seller's Assets owned by it except in the ordinary course of business and it will advise Purchaser of any contracts or commitments which it or either such Partnership enters, whether in the ordinary course of business or otherwise; vi. During normal business hours, (i) Seller BSL will provide Purchaser and its agents with access (in the company of a representative of Seller) on 24 hours notice to the MLK Real Property and the MLK MOB and at such times Seller BSL shall permit Purchaser to inspect the books and records and the physical and structural condition thereof; provided, however, that Purchaser's satisfaction therewith shall not be a condition to Purchaser's obligation to close the transaction provided for herein and (ii) Seller BPI, in its capacity as general Partner of the Pavilion Partnership and the Scottsdale Partnership, will provide Purchaser and its agents with access (in the company of a representative of Seller) on 24 hours notice to, as applicable, the Pavilion Real Property and Improvements and the Scottsdale Real Property and Improvements, and at such times Seller BPI shall permit Purchaser to inspect the books and records pertaining thereto and the physical and structural condition thereof; vii. It will timely pay or perform or cause to be paid or performed all obligations which are due and payable with respect to or that arise out of any contract or agreement binding upon the portion of the Seller's Assets owned by it including, without limitation, all such obligations or agreements of the Scottsdale Partnership or the Pavilion Partnership; viii. It will proceed with all due diligence to secure any consents which may be necessary for the sale of the Seller's Assets and, in the case of Seller BSL, for the assumption by Purchaser of the MLK Loan Documents; ix. Seller BSL and Seller BPI will provide Purchaser within ten (10) days after execution of this Agreement with copies of any appraisals, surveys, inspection and testing documentation or reports, including, but not limited to, environmental reports, structural report or geological reports which may be in its possession with respect to the (i) MLK MOB and the MLK Real Property, (ii) the Pavilion Real Property and Improvements and (iii) the Scottsdale Real Property and Improvements. b. Closing. On the Closing Date, each of Brim, BPI and BSL agrees for the benefit of Purchaser on its own behalf and not on behalf of the other entity that it will: 14 15 i. Execute and deliver to Purchaser the Conveyancing Documents which are due from it with respect to the portion of the Seller's Assets owned by it and such endorsements, assignments and other instruments of transfer and conveyance as shall be necessary to transfer and assign the portion of the Seller's Assets owned by it to Purchaser as herein provided; ii. Deliver to Purchaser a certificate dated as of the Closing Date, certifying in such detail as Purchaser may reasonably specify the fulfillment of the conditions set forth in Paragraph(s) 13(a) and (b) subject to the limitations set forth in Paragraph 25 and setting forth the incumbency of the officers executing documents on behalf of it, a copy of the resolutions adopted by its Board of Directors and, if applicable, shareholders, authorizing the transaction provided for herein and the execution of this Purchase Agreement and the other documents contemplated herein and attaching a certificate of good standing or legal existence issued by each of the Oregon and California Secretary of State in the case of Seller BSL, by each of Oregon and Arizona in the case of Seller BPI and by each of the Oregon and Arizona Secretary of State in the case of Seller Brim within no more than thirty (30) days prior to Closing; and iii. Pay its share of the Closing costs in accordance with Paragraph 5 c. Post-Closing. After the Closing of this Agreement, each of Seller Brim, Seller BPI and Seller BSL agrees as follows: (i) Upon Purchaser's request and at Purchaser's sole cost and expense, it will take such actions and properly execute and deliver to Purchaser such further instruments of assignment, conveyance and transfer as, in the reasonable opinion of its counsel or counsel for Purchaser, may be reasonably necessary to assure, complete and evidence the full and effective transfer and conveyance of the portion of the Seller's Assets owned or controlled by it. (ii) Brim, BPI and BSL will recognize, on Brim's consolidated federal income tax return for taxable year 1996, a gain equal to the amount of the goodwill and going concern value of the Brim, BPI and BSL transferred to the Purchaser as a result of the transaction provided for herein (and each of Brim, BPI and BSL shall make the election required by Section 197(f) of the Code). The amount of such goodwill and going concern value will be determined in accordance with the allocation of the purchase price contemplated by Section 2 hereof. Brim agrees to recognize and pay federal income tax at a 35% rate on the amount of gain specified in this paragraph, notwithstanding any loss, deduction, credit or other allowance or offset to which it may otherwise be entitled under any provision of the Code or the regulations promulgated thereunder. 15 16 11. Purchaser a. Pre-Closing. Between the date hereof and the Closing Date, except as contemplated by this Agreement or with the consent of Seller, Purchaser agrees that: i. Purchaser will not take any action inconsistent with its obligations under this agreement or which could hinder or delay the consummation of the transaction contemplated by this Agreement; ii. Purchaser will proceed with all due diligence to obtain all consents and approvals necessary to permit the consummation of the transaction contemplated by this Agreement. b. Closing. On the Closing Date, Purchaser agrees that it will: i. Pay the Purchase Price due at Closing; ii. Pay its share of the Closing costs as provided in Paragraph 5; iii. Deliver to Seller a certificate of a responsible member of its Management Committee dated as of the Closing Date, certifying in such detail as Seller may reasonably specify the fulfillment of the conditions set forth in Paragraph(s) 14(a) and (b) subject to the limitations set forth in Paragraph 26 and setting forth the incumbency of the member(s) of the Management Committee executing documents on behalf of Purchaser, a copy of the resolutions adopted by Purchaser's Members authorizing the transaction provided for herein and the execution of this Purchase Agreement and the other documents contemplated herein and attaching a certificate of existence or good standing, as applicable, issued by the Nevada and, if applicable, Arizona, Oregon, California and Texas offices of the Secretary of State within no more than thirty (30) days prior to Closing; iv. Execute the Conveyancing Documents; c. Post-Closing. After the Closing of this Agreement, Purchaser agrees that it will: i. Provide Seller with access during normal business hours to any books or records which Seller may need to file or to defend tax returns or other filings filed prior or subsequent to the Closing Date which relate to periods prior to the Closing Date; and ii. Take such actions and properly execute and deliver such further instruments as Seller may reasonably request to assure, complete and evidence the transaction provided for in this Agreement. 16 17 12. Mutual Following the execution of this Agreement, Purchaser and Seller agree: a. If any event should occur, either within or without the knowledge or control of Purchaser or Seller, which would prevent fulfillment of the conditions to the obligations of any party hereto to consummate the transaction contemplated by this Agreement, to use its or their reasonable efforts to cure the same as expeditiously as possible; and b. To cooperate fully with each other in preparing, filing prosecuting, and taking any other actions which are or may be reasonable and necessary to obtain the consent of any governmental instrumentality or any third party or to accomplish the transaction contemplated by this Agreement. CONDITIONS 13. All obligations of Purchaser under this Agreement are subject to fulfillment, prior to or at Closing, of each of the following conditions, any one or all or which may be waived in writing by Purchaser: a. Seller's Representations and Warranties True at Closing. Seller's representations and warranties contained in this Agreement or in any certificate delivered in connection with this Agreement or the transactions contemplated herein shall be true in all material respects at and as of the date of Closing as though such representations and warranties were then again made. b. Seller's Performance. Seller shall have performed all of its obligations under this Agreement that are to be performed prior to or at Closing to the extent the same have not been waived by Purchaser in accordance with the terms hereof. c. No Defaults. Seller shall not be in default, where said default cannot be cured by Closing, under any mortgage, contract, lease or other agreement to which Seller is a party or by which Seller is bound and which affects or relates to the Seller's Assets. d. Approvals. Purchaser and/or Seller shall have received all consents and approvals as may be necessary for Seller to sell and Purchaser to purchase the Seller's Assets. e. Financing. Purchaser shall have secured the consent of the lender to its assumption of the MLK Loan Documents and to the concurrent release of Seller from any further liability thereunder and all of the documents necessary to evidence the same shall have been executed and delivered into escrow by Purchaser and the lender. 17 18 f. Other Brim Transactions. The closing of those transactions described in Exhibit M shall have occurred (the "Other Brim Transactions"). In the event any of the foregoing conditions is not satisfied by Seller or Purchaser, as appropriate, or waived by Purchaser prior to Closing, Purchaser shall have the right to terminate this Agreement in accordance with the provisions of Paragraph 16. 14. CONDITIONS TO SELLER'S OBLIGATIONS All obligations of Seller under this Agreement are subject to the fulfillment, prior to or at Closing, of each of the following conditions, any one or all of which may be waived by Seller in writing: a. Purchaser's Representations and Warranties True at Closing. Purchaser's representations and warranties contained in this Agreement or in any certificate or document delivered in connection with this Agreement or the transactions contemplated herein shall be true in all material respects at and as of the date of Closing as though such representations and warranties were then again made. b. Purchaser's Performance. Purchaser shall have performed its obligations under this Agreement that are to be performed prior to or at Closing to the extent the same have not been waived by Seller in accordance with the terms hereof. c. Approvals. Purchaser and/or Seller shall have received all consents and approvals as may be necessary for Seller to sell and Purchaser to purchase the Seller's Assets. d. Financing. Purchaser shall have secured the consent of the lender to its assumption of the MLK Loan Documents and to the concurrent release of Seller from any further liability thereunder and all of the documents necessary to evidence the same shall have been executed and delivered into escrow by Purchaser and the lender. e. Other Brim Transactions. The closing of the Other Brim Transactions shall have occurred. In the event any of the foregoing conditions is not satisfied by Seller or Purchaser, as appropriate, or waived by Seller prior to Closing, Seller shall have the right to terminate this Agreement in accordance with the provisions of Paragraph 16. INDEMNIFICATION 15. Seller and Purchaser acknowledge and agree that Purchaser is more familiar with the Seller's Assets than the owners of the Seller will be immediately after the Closing due to the fact that the affect of the Other Brim Transactions will be to change the ownership and control of Seller Brim and 18 19 Seller BSL immediately after the Closing of the transactions provided for herein and therein. Accordingly, it is the intent of the parties that Seller shall on the Closing Date be relieved of all obligations and liabilities with respect to the Seller's Assets regardless of whether the same relate to the period prior to or after the Closing Date and that Seller shall have no liability hereunder for a breach of its representations and warranties or covenants. It is further understood and agreed that Purchaser's sole remedy in the event of a breach prior to Closing by Seller of its representations, warranties or covenants hereunder shall be to terminate this Agreement prior to Closing and that, failing that, Purchaser shall be deemed to have waived any rights which it may otherwise have against Seller with respect to a breach thereof. Seller and Purchaser further acknowledge and agree that consistent with the foregoing intent of the parties, Purchaser shall indemnify and hold each of Seller Brim, Seller BSL and Seller BPI, as applicable, harmless from and against: a. Any and all costs, damages, expenses, liabilities and obligations relating to the ownership of the Seller's Assets whether the same relate to the period prior to or after the Closing Date; b. Any and all damage, loss or liability resulting from any misrepresentation of a material fact, breach of warranty or nonfulfillment of any agreement on the part of Purchaser under this Agreement or from any misrepresentation in any certificate furnished or to be furnished by Purchaser to Seller hereunder; c. Any and all damage, loss or liability resulting from the failure to secure any third party consents required in connection with the transactions contemplated herein, including, but not limited to the consent of the landlord under the MLK Lease and the consent of the owners under the Pavilion and Scottsdale Management Agreements; and d. Any and all actions, suits, proceedings, demands, assessments, judgments, reasonable costs and other reasonable expenses, including, but not limited to, reasonable attorney's fees, incident to any of the foregoing. TERMINATION 16. a. This Agreement may be terminated and the transaction contemplated herein abandoned at any time prior to Closing: i. By mutual agreement of the parties; provided, however, the parties shall not agree to such a termination unless the parties to the transactions which are the subject of the Other Brim Agreements have agreed to a termination thereof; and provided, further, that the parties shall be required to agree to such a termination in the event the parties to the transactions which are the subject of the Other Brim Agreements have agreed to a termination thereof; ii. By Seller, if any of the conditions set forth in Paragraph 14 shall have become incapable of fulfillment prior to the Closing Date or such earlier date as may be specifically 19 20 provided for the performance thereof (as the same may be extended) through no fault of Seller and the same shall not have been waived by Seller; iii. By Purchaser, if any of the conditions set forth in Paragraph 13 shall have become incapable of fulfillment prior to the Closing Date or such earlier date as may be specifically provided for the performance thereof (as the same may be extended) through no fault of Purchaser and the same shall not have been waived by Purchaser; iv. By either Seller or Purchaser in the event of a material breach by the other party of its obligations hereunder; v. If the Closing has not occurred by the Outside Closing Date specified in the Other Brim Agreements, which, Seller and Purchaser acknowledge, as of the date of the execution of this Agreement is December 31, 1996. c. Neither party to this Agreement may claim termination or pursue any other remedy referred to in Paragraph 16(a) on account of a breach of a condition, covenant or warranty by the other, without first giving such other party written notice of such breach and not less than ten (10) days within which to cure such breach; provided, however, in no event shall the Closing Date be postponed beyond the Outside Closing Date. d. In the event of the termination of this Agreement by Seller under Paragraphs 16(a)(ii) or (iv) or under Paragraph 16(a)(v) in the event the Closing has failed to occur as a result of a material breach by Purchaser of its obligations hereunder, Seller shall be entitled to pursue such remedies as may be available to it as law or in equity with respect thereto. e. In the event of the termination of this Agreement by Purchaser under Paragraphs 16(a)(iii) or (iv) or under Paragraph 16(a)(v) in the event the Closing has failed to occur as of a material breach by either or any combination of the entities comprising Seller of its obligations hereunder, Purchaser shall have the right as Purchaser's sole and exclusive remedies either to (i) terminate this Agreement after which neither party shall have any further rights or obligations hereunder or (ii) seek specific performance against the breaching entity of its obligations hereunder. NOTICES 17. Any notice, request or other communication to be given by any party hereunder shall be in writing and shall be sent by registered or certified mail, postage prepaid, by overnight courier guaranteeing overnight delivery or by facsimile transmission (if confined verbally or in writing by mail as aforesaid), to the following address: 20 21 To Seller: c/o Brim, Inc. 305 NE 102nd Avenue Portland, OR 97020 Attn: A. E. Brim, President Phone No.: 503-256-2070 FAX No.: 503-254-7619 To Purchaser: Plaza Enterprises, L.L.C. 305 NE 102nd Avenue Portland, OR 97020 Attn: K. David McAllister Phone No.: 503-256-2070 FAX No.: 503-254-7619 Notice shall be deemed given three (3) business days after deposit in the mail, on the next day if sent by overnight courier and on receipt if sent by facsimile (and confirmed verbally or by mail as aforesaid). SOLE AGREEMENT 18. This Agreement may not be amended or modified in any respect whatsoever except by instrument in writing signed by the parties hereto. This Agreement, together with all other agreements referenced herein and all exhibits and schedules hereto, constitutes the entire agreement between the parties hereto and supersedes all prior negotiations, discussions, writings and agreements between them. SUCCESSORS 19. The terms of this Agreement shall be binding upon and inure to the benefit of and be enforceable by and against the heirs and successors of the parties hereto, it being specifically understood and agreed that Purchaser shall have the right to assign in whole or in part its rights and obligations hereunder to an affiliate; provided no such assignment shall relieve Purchaser of its obligations hereunder and provided, further, that Purchaser shall provide Buyer with notice of any such assignment and such assignee shall assume all of Purchaser's obligations hereunder in writing. CAPTIONS 20. The captions of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. 21 22 SURVIVAL/LIMITATION OF ACTIONS 21. The covenants, warranties and representations of Seller shall not survive, and shall terminate at, Closing. The covenants, warranties and representations and indemnity obligations of Purchaser shall survive the Closing Date. GOVERNING LAW 22. This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon. SEVERABILITY 23. Should any one or more of the provisions of this Agreement be determined to be invalid, unlawful or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. COUNTERPARTS 24. This Agreement may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. This Agreement may be executed (i) on an original, (ii) a copy of an original, or (iii) by a facsimile transmission copy of an original followed within five (5) calendar days with execution of an original. THIRD PARTY BENEFICIARY 25. The provisions of this Agreement are not intended to confer any benefits upon any person or entity not a party to this Agreement other than Encore Senior Living, LLC which shall be a third party beneficiary of the indemnity provisions of Paragraph 15 hereof with respect to the MLK Lease, the MLK MOB, the MLK Cash and the MLK Real Property. 22 23 IN WITNESS WHEREOF, the parties hereby execute this Agreement as of the day and year first set forth above. SELLER: BRIM, INC. By: /s/ A. E. Brim -------------------------------- Its: President ------------------------------- BRIM SENIOR LIVING, INC. By: -------------------------------- Its: Vice President ------------------------------- BRIM PAVILION, INC. By: -------------------------------- Its: President ------------------------------- PURCHASER: PLAZA ENTERPRISES, L.L.C. By: /s/ K. David McAllister ------------------------------- Its: Member-Executive Committee ------------------------------ 23 EX-10.27 19 LEASE AGREEMENT DATED 12-17-96 1 Exhibit 10.27 LEASE AGREEMENT THIS LEASE AGREEMENT dated December 17, 1996, by and between BRIM INC., an Oregon corporation, with its principal offices at 305 N.E. 102nd, Portland, Oregon 97220, hereinafter called LESSOR, and ENCORE SENIOR LIVING, LLC, a Delaware limited liability company, with its principle offices at 305 N.E. 102nd, Portland, Oregon 97220, hereinafter called LESSEE. WITNESSETH: The Lessor hereby leases to the Lessee and Lessee hereby leases from the Lessor, the following described property (the "Premises") to wit: Office space located at 305 NE 102nd, City of Portland, State of Oregon, upon the property (the "Building") described as Lots 14 and 15 Hudson Acres, County of Multnomah, State of Oregon comprised of an aggregate of 7,174 square feet (exclusive of staircases, elevators, bathrooms, common circulation space and conference rooms), approximately 2,980 square feet of which is located on the second floor and 3,164 square feet of which is located an the third floor, all as shown more fully on Exhibit A. In addition, the Premises shall include the non-exclusive right to use the following common areas within the Building: common circulation space, including circular stairs, facsimile and copy rooms and conference rooms (the "Common Areas"). The total square footage of the Common Areas is 4,924 square feet, 24% of which or 1,030 square feet of which shall be allocated to Lessee as follows: Circulation Space 534 square feet Facsimile and Copy Rooms 106 square feet Conference rooms 390 square feet Further, Lessee shall have the right to use 20% of the space in the basement of the Building for archive storage purposes and the same shall be deemed be a portion of the Premises leased hereunder. AGREEMENT 1. TERM. Subject to the extension options provided for in Paragraph 32, Lessee shall have and to hold the above described Premises for a term of twenty-seven (27) months commencing on the consummation of the merger of Brim Senior Living,("BSL") and Lessee (the "Commencement Date"). Lessor and Lessee will execute and attach herein as Exhibit B a written confirmation of the Commencement Date. 1 2 2. MAINTENANCE, USE AND POSSESSION. Lessee, or any of its affiliated companies, shall use the Premises for general office purposes and for no other purpose without prior written consent of Lessor. Lessee, at the expiration of the Term, shall deliver the Premises in good repair and condition, with the exception of damages beyond the control of Lessee, reasonable use, and ordinary wear and tear. Lessee shall not unreasonably annoy, obstruct, or interfere with the rights of other tenants in the Building and shall not use Premises for any unlawful purpose or so as to constitute a nuisance. During the term hereof, in order to facilitate Lessee's use of the Premises for the purpose stated herein, Lessor shall, at Lessor's expense, maintain in good condition and repair the exterior of the Building, including the windows, parking lot, landscaping, and the interior of the Building, including the common areas, systems, the lobby, the elevators and the stairways. Notwithstanding the foregoing, subject to the provisions of Paragraph 21, Lessee shall reimburse Lessor for all costs and expenses for maintenance and repairs incurred by Lessor as a result of Lessee's negligence or intentional misconduct. 3. RENT. Lessee hereby covenants and agrees to pay Lessor, without any demand, offset, deduction or counterclaim whatsoever, a monthly rent of $9,565 for the term of the lease. Monthly rent shall be paid on the first day of each and every calendar month. Rent not paid within 20 days of due date shall bear interest at the rate of 9% per annum from the due date until paid. Lessor may at its option impose a late charge of five percent (5%) of the amount due for rent payments made more than 20 days late in lieu of interest for the first month of delinquency, without waiving any other remedies available for default. Failure to impose a late charge shall not be a waiver of Lessee's right hereunder. Monthly rental shall remain fixed regardless of minor discrepancies in square footage. 4. NOTICES. For the purpose of notice or demand, the respective parties shall be served by personal delivery or by certified mail, return receipt requested, addressed to the Lessee at its principal office address, 305 N.E. 102nd, Portland, Oregon 97220, and to the Lessor at its mailing address, 305 N.E. 102nd, Portland, Oregon 97220, or to such other addresses as either party may specify by notice to the other. Notice shall be effective when received or when receipt is refused. 5. ORDINANCES AND REGULATIONS. The Lessee hereby covenants and agrees to comply with all applicable laws, ordinances, rules, and regulations of any public authority having jurisdiction over the Premises at Lessee's sole cost and expense, but only insofar as such laws, ordinances, rules and regulations pertain to the manner in which the Lessee shall use the Premises. 6. SIGNS. The Lessee will not place any signs on the exterior of the Building in which the Premises are located without the prior written consent of the Lessor, with the exception that Lessee may add its name in comparable lettering to the front entrance. Lessor will provide a listing for Lessee on the main directory. 2 3 7. UTILITIES AND SERVICES. Lessor agrees, at its expense, to continuously furnish water, sewer, electricity, elevator service, heat and air conditioning customary for building of the same nature, use, class and location as the Building. Janitorial service and trash removal will be provided in accordance with the regular schedule of the Building which may change from time to time. Lessee shall comply with all government laws or regulations regarding the use or reduction of use of utilities on the Premises. Lessee acknowledges and agrees that the building shall be locked between the hours of 6:00 PM and 7:30 AM and that a receptionist shall be on duty in the main lobby during normal business hours of operation Monday through Friday, except holidays, and that the foregoing shall constitute the sole security with respect to the Premises provided by Lessor. Interruption of services or utilities shall not be deemed an eviction or disturbance of Lessee's use and possession of the Premises, render Lessor liable to Lessee for damages (other than in the event such interruption is due to the negligence or wilful misconduct of Lessor) or, except as specifically provided herein, relieve Lessee from performance of Lessee's obligations under this Lease. Lessor shall take all reasonable steps to correct any interruptions in services. Lessee shall provide its own protection for power furnished to computers and other equipment. Notwithstanding the foregoing, in the event services or utilities are interrupted for a period of more than three (3) consecutive days, the rent due from Lessee shall be abated in its entirety from and after such three day period unless and until such services are restored. Lessor shall further make available to Lessee throughout the Term hereof, the telephone equipment, including the switching systems and telephones, as well as the services of Lessor's receptionist, which is currently located at the Building or such replacement equipment as may be acquired by Lessor at any time during the Term, provided such replacement equipment does not reduce or otherwise adversely affect the telephone service available to Lessee. Lessee shall pay all costs and expenses of telephone services provided to Lessee by third party providers, including all local and long distance calls made by Lessee or its employees and a pro rata share of any service maintenance fees charged to Lessor. 8. EQUIPMENT. Lessee shall install in the Premises only such office and other equipment as is customary and shall not alter the plumbing or wiring of the Premises or Building without prior written approval from the Lessor. Lessor must approve the location of exceptionally heavy articles. All telecommunications equipment, conduit, cables and wiring and any additional air-conditioning requirements because of heat generating equipment or special lighting installed by Lessee shall be installed and operated at Lessee's expense. 9. ALTERATIONS. Except as otherwise provided herein, Lessee shall not make any alterations, additions or improvements to the Premises, change the color of the interior or install any wall or floor covering without Lessor's prior written consent. Lessee shall have the right to make alterations, additions or improvements to the Premises with prior notice to, but without the consent of, Lessor if the cost thereof does not exceed $10,000 in the aggregate and the same do not affect the structure or systems of the Building and/or it is not foreseeable that it would unreasonably interfere with Lessor's occupation, use or enjoyment of the portion of the Building occupied by it. Any such 3 4 improvements, alterations, wiring cables or conduit installed by Lessee shall at once become part of the Premises and belong to Lessor except for removable machinery and unattached movable trade fixtures. Lessor shall have the right to approve the contractor used by Lessee for any work in the Premises. Any such alterations shall be made at such times and in such manner as not to unreasonably interfere with occupation, use and enjoyment of the remainder of the Building by other tenants thereof. Lessor may, at its option, condition its consent to any such alteration, additions or improvements on Lessee's agreement to remove the same at the end of the Lease Term and to repair any damage to the Premises caused by such removal. 10. QUIET ENJOYMENT. The Lessor covenants and agrees that Lessee, upon payment of monthly rent, and performing the covenants and other obligations herein, shall and may peaceably and quietly hold and enjoy the said Premises and common areas, including, but not limited to, sidewalks, entrances, exits, lobbies, restrooms and lounges for the term aforesaid. Lessee shall have nonexclusive use of the so called "Garden Room" which is located on the first floor of the Building behind the elevators, the elevators and conference rooms located on the third and fourth floors of the Building. Lessee's access to the Garden Room shall not be subject to any limitations other than general availability, it being understood and agreed that Lessee and Lessor shall each be required to reserve the Garden Room through the Building receptionist no less than eight (8) hours prior to the anticipated use thereof but shall be permitted to use the Garden Room even if the same has not been reserved so long as it is not otherwise occupied. 11. LESSOR'S RIGHT TO INSPECT AND DISPLAY. Lessor shall have the right at all times during the term of this Lease to enter Premises for the purpose of examining or inspecting same and for making such repairs or alterations as the Lessor shall reasonably deem necessary in order to fulfill its maintenance and repair obligations hereunder. The Lessor shall also have the right to enter the Premises at all reasonable hours for the purpose of showing the Premises to any prospective tenants ninety (90) days prior to the termination of this Lease. Except in case of emergency, Lessee shall be given reasonable advance notice of Lessor's intent to enter Premises and such entry shall be at such times and in such manner as to minimize interference with the reasonable business use of Premises by Lessee. 12. FIRE AND OTHER DESTRUCTION OF PREMISES. A. MAJOR DAMAGE. In the case of major damage to the Building, Lessor may elect to terminate this Lease by notice in writing to Lessee within sixty (60) days from the date of such damage. Major damage means damage by fire or other casualty to the Building which will cost more than twenty-five percent (25%) of the pre-damage value of the Building to repair. If this Lease is not terminated following major damage, Lessor shall promptly restore the Premises to the condition existing just prior to the damage subject to Paragraph 12C. Rent shall cease on the date of damage until the date restoration work being performed by Lessor is substantially complete or until the Lessee resumes use and occupancy of the 4 5 Premises, whichever shall first occur. Notwithstanding the foregoing, the rent shall not abate if such damage is caused by Lessee's negligence or intentional misconduct. B. PARTIAL DAMAGE. In the case of any damage that is not major damage, Lessor shall undertake to restore, rebuild or repair the Premises. If such work is not accomplished within sixty (60) days, and such failure does not result from causes beyond the control of Lessor, the Lessee shall have the right to terminate this Lease by written notice to the Lessor within thirty (30) days after expiration of said sixty day period. Rent shall be reduced from the date of damage in proportion to the area of the Premises not usable by Lessee. Notwithstanding the foregoing, the rent shall not abate if such damage is caused by Lessee's negligence or intentional misconduct. C. LIMITATION OF LESSOR LIABILITY. The Lessor shall not be liable for any inconvenience or interruption of business of the Lessee occasioned by fire or other casualty other than where the same is due to the negligence or wilful misconduct of Lessor. Lessor shall not be obligated to carry fire, casualty or extended damage insurance on the person or property of the Lessee or any person or property which may now or hereafter be placed in the leased Premises. 13. CONDEMNATION. If, during the term of Lease, or any renewal thereof, the whole of the Premises, or such portion thereof as will make the Premises unusable for the purpose leased, is condemned by public authority for public use, then in either event, the term hereby granted shall cease and come to an end as of the date of the vesting of title in such public authority or when possession is given to such public authority, whichever event last occurs. Upon such occurrence the rent shall be proportioned as of such date and any prepaid rent shall be returned to the Lessee. Lessor shall be entitled to the entire award for such taking except for any statutory claim of the Lessee for injury, damage or destruction of Lessee's business accomplished by such taking. Notwithstanding the foregoing, Lessee may pursue a separate award to recover the cost of Lessee's moving expenses and improvements to the Premises paid for by Lessee and the loss of any trade fixtures or personal property, provided that such separate award shall not reduce the award or judgement recoverable by Lessor. If a portion of the Premises is taken or condemned by public authority far public use so as not to make the remaining portion of the Premises unusable for the purposes leased, this Lease will not be terminated, but shall continue. In such case, the rent shall be equitably and fairly reduced or abated for the remainder of the term in proportion to the amount of the Premises taken. In no event shall the Lessor be liable to the Lessee for any business interruption diminution in use or for the value of any unexpired term of this Lease. 14. ASSIGNMENT AND SUBLEASE. This Lease shall bind and inure to the benefit of the parties, their respective heirs, successors and assigns, provided that Lessee shall not assign its interest under this Lease or sublet all or any portion of the Premises, other than to an affiliate of Lessee, without first obtaining Lessor's consent in writing. No assignment shall relieve Lessee of its obligation to pay any rent due or perform other obligations required by this Lease unless agreed to in writing by Lessor, and no consent by Lessor to one assignment or subletting shall be a consent 5 6 to any further assignment or subletting. Lessor shall be permitted to grant or to withhold its consent to any assignment or subletting in its sole and absolute discretion. In the event Landlord refuses to consent to an assignment or subletting and as a result a portion of the Premises remains unoccupied for a period of ninety (90) consecutive days, Lessor and Lessee agree to negotiate in good faith with respect to an amendment to the Lease in order to reduce the area which is included in the Premises and the rent due with respect thereto and to document such amendment within thirty (30) days thereafter. For purposes hereof, an assignment of the Lease by operation of law as a result of the merger, consolidation or sale of all or substantially all of the assets or membership interests of Lessee, other than to an affiliate, shall be deemed to be an assignment of this Lease. Lessor shall not lease that portion of the Building indicated on Exhibit C, other than to an affiliate of Lessor, without first obtaining Lessee's consent, which consent shall not be unreasonably withheld. 15. SURRENDER AND HOLDOVER. Lessee may hold over at the end of the term without extending the term or renewing the Lease provided that Lessor has not given thirty (30) days prior written notice to Lessee to vacate on the expiration date. Tenancy shall continue on a month to month basis at the same monthly rent in effect at the end of the Lease term and upon the same terms and conditions as herein set forth until terminated by either party by providing thirty (30) days prior written notice to the other party prior to the desired termination date. Acceptance by the Lessor of rent after such termination shall not constitute a renewal of this Lease or a consent to occupancy, except as set forth in this Section 15, nor shall it waive Lessor's first right of reentry or any other right contained herein. On termination of this Lease, Lessee shall deliver all keys to Lessor and surrender the Premises in same condition as at the commencement of the term, subject only to damage beyond control of Lessee and to reasonable wear and tear from ordinary use. Lessee shall remove all of its furnishings and trade fixtures that remain its property and Lessee may dispose of it in any manner without liability. Lessee shall have no obligation to remove any alterations made by Lessee which do not require the consent of Lessor under Section 9 or which have been consented to by Lessor in accordance with Section 9 and where such consent was not specifically conditioned on such removal. 16. SUBORDINATION. Lessee's rights under this Lease are and shall always be subordinate to the operation and effect of any such mortgage, deed of trust, assignment of leases or other security instrument or operating agreement now or hereafter placed by Lessor against or governing the Building or related improvements and land on which the Premises are located or any part thereof. This clause shall be self operative and no further instrument of subordination shall be required. In confirmation thereof, Lessee shall execute such further assurances as may be reasonably required by Lessor or any mortgagee, trustee, beneficiary, or assignee under such mortgage, deed of trust, assignment of leases or other security instrument. The foregoing notwithstanding, any mortgagee, trustee, beneficiary, Lessee or assignee may elect that this Lease shall have priority over its mortgage, deed of trust or other security instrument and upon notification of such election by any such mortgagee or beneficiary to Lessee, this Lease shall be deemed to have priority over said 6 7 mortgage, deed of trust, assignment of leases or other security instrument whether this Lease is dated prior to or subsequent to the date of such mortgage, deed of trust, assignment of leases or other security instrument. Lessee agrees to execute all instruments reasonably required by any such mortgagee, trustee, beneficiary, or assignee to confirm such priority or subordination, as the case may be. Lessee hereby attorns to any successor to Lessor's interest in this Lease, and shall recognize such successor as Lessor hereunder. Lessee agrees to execute all instruments requested by such successor to confirm such attornment. 17. TRANSFER OF BUILDING. If the Building is sold or otherwise transferred by Lessor or any successor, Lessee shall attorn to the purchaser or transferee and recognize it as the Lessor under this Lease, and, provided the purchaser or transferee assumes all obligations hereunder, the transferor shall have no further liability hereunder. 18. ESTOPPEL CERTIFICATES. Either party, within ten (10) days after notice from the other, will execute, acknowledge and deliver to the other party a certificate certifying whether or not this Lease has been modified and is in full force and effect; whether there are any modifications or alleged breaches by the other party; the dates to which rent has been paid in advance and the amount of any security deposit or prepaid rent; and any other facts that may reasonably be requested. Failure to deliver the certificate within the specified time shall be conclusive upon the party of whom the certificate was requested that the Lease is in full force and effect and has not been modified except as may be represented by the party requesting the certificate. If requested by the holder of any encumbrance, Lessee will agree to give such holder notice of an opportunity to cure any default by Lessor under this Lease. 19. INDEMNIFICATION. Each of Lessee and Lessor (the "Indemnifying Party") shall indemnify, defend and save the other (the "Indemnified Party") harmless from any claim, liability, damage or losses occurring on the Premises arising out of any activity by the Indemnifying Party, its agents, employees, guests or invitees or resulting from the Indemnifying Party's failure to comply with any term of the Lease. Neither Lessor nor its managing agent shall have any liability to Lessee because of loss or damage to Lessee's property or for death or bodily injury caused by the acts or omissions of other tenants of the Building, by third parties (including criminal acts) or because of fire, Acts of God or for any other reason unless caused by the negligence or wilful misconduct of Lessor or any of its agents or employees. If Lessee's use of the Premises results in Lessor's insurance premium for the Building to be increased, Lessee agrees to pay, as Additional Rent, the entire cost of such increase. 20. INSURANCE. Lessee shall carry liability insurance with limits of not less than $1,000,000 combined single limit bodily injury and property damage. Such insurance shall have an endorsement naming Lessor as an additional insured and covering the liability insured under this Paragraph 20 of this Lease. Lessee shall furnish to Lessor a certificate evidencing such insurance which shall state that the coverage shall not be canceled or materially changed without ten (10) days prior written notice to Lessor. A renewal certificate shall be furnished at least ten (10) days prior to expiration of any policy. Lessor shall carry replacement value property insurance and liability insurance on the 7 8 Building with limits of not less than $1,000,000. Such insurance shall have an endorsement naming Lessee as an additional insured as to the liability insurance. Lessor shall furnish to Lessee a certificate evidencing such insurance which shall state that the coverage shall not be canceled or materially changed without ten (10) days prior written notice to Lessee. A renewal certificate shall be furnished at least ten (10) days prior to expiration of any policy. Should either Lessor or Lessee fail to secure the insurance coverage required by the terms hereof, the other party shall have the right to secure such coverage on behalf and in the name of the defaulting party and upon demand the cost thereof shall be immediately due and payable to the party which secured such coverage. 21. WAIVER OF SUBROGATION. Lessee shall be responsible for insuring its personal property and trade fixtures located on the Premises and any alterations or tenant improvements it has made to the Premises. Subject to each of Landlord and Tenant maintaining the insured required by the terms hereof, Lessor and Lessee hereby waive all rights to recover against each other or against any shareholder, director, officer, employee, agent, customer, or invitee thereof for any loss or damage arising from any cause covered by any insurance proceeds which are actually recovered for such loss or damage. Lessor and Lessee shall cause their respective insurers to issue appropriate waiver of subrogation rights endorsements to all policies of insurance carried pursuant to this Lease. Lessee shall cause all other occupants of the Premises claiming by, though or under lessee to execute and deliver to Lessor a waiver of claims similar to the waiver in this paragraph and to obtain such waiver of subrogation rights endorsements. 22. MAINTENANCE AND REPAIR. Lessor shall, at its expense, make all repairs and replacements to Building and Premises, including the heating and air conditioning system, which are necessary to maintain Building and Premises in safe, dry and tenantable conditions and in reasonably good order and repair. Lessor shall have the right to erect scaffolding and other apparatus necessary for the purpose of making repairs, and, absent Lessor's negligence or wilful misconduct, Lessee shall have no claim against Lessor for any interruption or reduction or services or interference with Lessee's occupancy which lasts for less than three consecutive days, and no such interruption or reduction shall be construed as constructive or other eviction of Lessee but any such interruption or reduction or interference which lasts for more than three consecutive days shall entitle Lessee to an abatement of its rent in its entirety from and after such three day period until such services or occupancy are restored. Repair of damage caused by negligent or intentional acts or breach of this Lease by Lessee, its employees or invitees shall be at Lessee's expense. Lessor shall have no liability for failure to perform required maintenance and repair unless written notice of such maintenance or repair is given by Lessee and Lessor fails to commence efforts to remedy the problem in a reasonable time and manner. 23. REGULATIONS. Lessor shall have the right but shall not be obligated to make, revise and enforce regulations or policies consistent with this Lease for the purpose of promoting safety, health (including regulation or prohibition of smoking), order, economy, cleanliness, and good service to all Lessees of the Building. All such regulations and policies shall be complied with as if part of this Lease. 8 9 24. RELOCATION OR EXPANSION OF PREMISES. Lessor and Lessee acknowledge and agree that during the Lease Term it may be necessary for either or both of them to relocate or expand within Building to accommodate changes in space requirements. Lessor and Lessee agree to negotiate in good faith with respect to the terms and conditions on which such expansion/relocation shall occur but neither Lessor nor Lessee shall be in default in the event they are unable to agree upon the terms and conditions thereof unless they have breached the good faith negotiation obligation provided for herein. 25. CONSTRUCTION OF LANGUAGE. The terms Lease, Lease Agreement or Agreement shall be inclusive of each other, and to include renewals, extensions or modifications of the Lease. Words of any gender used in this Lease shall be held to include any other gender, and words in the singular shall be held to include the plural and the plural to include the singular when the sense requires. The paragraph headings and titles are not a part of this Lease and shall have no effect upon the construction or interpretation of any part thereof. 26. DEFAULT. If any default made by either party in the performance or compliance with any of the terms or conditions of this Lease is not rectified within thirty (30) days after actual receipt of written notice from the other party, the other party may seek remedies for default under Paragraph 27. Any of the following shall constitute a default by Lessee under this Lease: A. Lessee's failure to pay monthly rent or any other charge under this Lease within thirty (30) days after it is due, or failure to comply with any other team or conditions within thirty (30) days following written notice from Lessor specifying the noncompliance. If such noncompliance cannot be cured within the 30-day period, this provision shall be satisfied if Lessee commences correction within such period and thereafter proceeds in good faith and with reasonable diligence to affect compliance as soon as possible. B. Lessee's insolvency, business failure or assignment for the benefit of its creditors. Lessee's commencement of proceedings under any provision of any bankruptcy or insolvency law or failure to obtain dismissal of any petition filed against it under such laws within the time required to answer, or the appointment of a receiver for Lessee's properties. C. Assignment or subletting by Lessee in violation of Paragraph 14. D. Vacation or abandonment of the Premises without the prior written consent of Lessor or failure to occupy the Premises within twenty (20) days after notice tendering possession. 27. REMEDIES FOR DEFAULT. In the event of default by either party in the performance or compliance with any of the terms or conditions of this Lease that is not rectified as provided for under Paragraph 26, or in the case of default by Lessee under Paragraph 26, either party shall have 9 10 the right to the following remedies which are intended to be cumulative and in addition to any other remedies provided under applicable law. A. Either party may at its option terminate this Lease forthwith by notice to the other party of the intent to terminate. With or without termination, Lessor, in the event of a default by Lessee, may retake possession of the Premises and may use or relet the Premises without accepting a surrender or waiving the right to damages. Following such retaking of possession, efforts by Lessor to relet the Premises shall be sufficient if Lessor follows its usual procedures for finding tenants for the space at rates not less than the current rates for other comparable space in the Building. If Lessor has other vacant space in the Building, prospective tenants may be placed in such other space without prejudice to Lessor's claim to damages or loss of rentals from Lessee. B. Either party may recover all damages caused by the other party's default and may sue periodically to recover damages as they occur through the Lease term. No action for accrued damages shall bar a later action for damages subsequently accruing. C. Either party may make any payment or perform any obligation which the other party has failed to perform, in which case the damaged party shall be entitled to recover from the other party upon demand all amounts so expended, plus interest from the date of the expenditure at the rate of nine percent (9%) per annum. Any such payment or performance by the damaged party shall not waive the other party's default. D. 28. ATTORNEYS' FEES. In any litigation arising out of this Lease, the prevailing party shall be entitled to recover attorneys' fees at trial and on any appeal. 29. NONWAIVER. Failure by either Lessor or Lessee to promptly enforce any regulation, remedy or right of any kind under this Lease shall not constitute a waiver of the same and such right or remedy may be asserted at any time after Lessor or Lessee, as applicable, becomes entitled to the benefit thereof notwithstanding delay in enforcement. 30. ENVIRONMENTAL CONCERNS. In the event any material and/or substance contained within the Building or on or under the land upon which the Building is located is determined to be "hazardous" by any federal, state or local law, and subject to the following sentence, Lessor shall assume all liability for the removal and damage caused by the material and/or substances. Except in the ordinary course of business in compliance with applicable laws governing the use of hazardous substances and in such quantities as may be permitted under such applicable laws, Lessee shall not cause or permit any hazardous materials to be brought upon the Building or Premises; provided, however, that as to hazardous substances brought upon the Building or Premises by Lessee or any employees or agents of Lessee (whether or not in compliance with applicable laws), Lessee shall 10 11 indemnify and hold harmless Lessor from and against any and all damages resulting from the presence of such hazardous materials in the Building or Premises. 31. PARKING. Lessor, at no additional expense to Lessee, should provide twenty-two (22) nonexclusive parking stalls within the parking lot located adjacent to the Building. 32. RENEWAL OPTIONS. Provided that Lessee is not in default under this Lease, Lessee shall have the option to renew this Lease for two successive terms of two years each. All terms and conditions of this Lease shall remain the same during the renewal terms except for monthly rent, which shall he adjusted to fair market rental value of the Premises as of the renewal date. The option shall be exercised by written notice of Lessor not less that ninety (90) days prior to the last day of the original term. If parties fail to agree on fair market rent, rent shall be determined by a third party mutually acceptable to Lessor and Lessee, the cost of which shall be shared equally. The decision of the third party will be final and binding upon the parties. 33. LESSEE RIGHT TO PURCHASE. In the event that Lessor desires to sell the Building, Lessor agrees to give Lessee or its assignee, a right to purchase the Building before offering the Building for sale to the public. Accordingly Lessor agrees that, for a period of twenty (20) days after Lessor advises Lessee of its good faith desire to sell the Building, it shall negotiate exclusively with Lessee or its assignee with respect to the terms and conditios on which such a sale would occur. In the event Lessor and Lessee or its assignee are able to reach agreement within said twenty (20) day period they shall proceed in good faith and with all reasonable diligence to agree on the terms of a Purchase and Sale Agreement and to consummate said transaction. In the event either Lessor and Lessee or its assignee are unable to agree upon the terms and conditions of said purchase within said initial twenty (20) day period or are subsequently unable to agree in the terms of a Purchase and Sale Agreement or to consummate the purchase and sale transaction (other than as a result of the failure of Lessor to negotiate in good faith) Lessor shall be free to sell the Building to a third party and neither Lessor shall have any further obligations to Lessee under this Paragraph 33 nor shall Lessee have any further rights under this Paragraph 33 with respect to the purchase and sale of the Building; provided, however, that any sale of the Building to a third party shall be subject to Lessee's leasehold rights under this Lease. 34. RIGHT OF FIRST REFUSAL. In the event at anytime during 1997, any or all the offices identified on Exhibit D are vacated by their current occupants, who the parties acknowledge and agree are Lee Zinsli. Kathy Sego and Tony Golda, Lessor shall advise Lessee in writing that said offices are available for the occupancy of Lessee and Lessee have the right at anytime during the remainder of 1997 (whether or not Lessor has otherwise put said offices to use) to advise Lessor of its desire to lease the relevant office(s) for the same rent per square foot as Lessee is then paying for the Premises under the terms of this Lease. In the event Lessee fails to exercise the right of first refusal granted hereunder during 1997, Lessor shall then be permitted to lease the affected office(s) to any other party without any further obligation to Lessee. 11 12 35. OREGON LAW. The law of the State of Oregon shall govern and control the terms of this Lease. 36. CONSTRUCTION. This Lease Agreement shall be construed as if drafted by both Lessor and Lessee jointly. 37. TIME IS OF THE ESSENCE. Time is of the essence of this Lease and each and every provision hereof. 38. ENTIRE AGREEMENT. This Lease and the attached Exhibits, constitute the entire agreement of the parties and supersede all prior written and oral agreements and representations. This Lease shall not be modified or amended except by written agreement signed by both parties. 39. LANDLORD LIABILITY. Notwithstanding anything to the contrary in this Lease, Lessee's sole recourse against Lessor is to the interest of Lessor in the Premises and the Building. Lessee shall not have the right to satisfy any judgment against Lessor from any other assets of Lessor; provided, however, that this paragraph shall not limit Lessee's right to seek injunctive relief or specific performance against Lessor. For the purposes of this paragraph, the term "Lessor" shall include any successor in interest to Lessor, and any shareholders, directors, officers or employees thereof. IN WITNESS WHEREOF, Lessee and Lessor have caused this instrument to be executed as of the date first above written, by their respective officers or parties thereunto duly authorized. LESSOR: BRIM, INC. By: /s/ Martin S. Rash -------------------------- Name: Martin S. Rash Its: President LESSEE: ENCORE SENIOR LIVING, LLC By: /s/ James Williams -------------------------- Name: James Williams Its: President 12 13 EXHIBIT A PREMISES Lots 14 and 15, Hudson Acres, as shown and recorded in Plat Book 804, Page 15, in the public records of County of Multnomah, State of Oregon. 13 14 EXHIBIT B CONFIRMATION OF LEASE COMMENCEMENT DATE Lessor and Lessee do hereby confirm that the Term of the foregoing Lease commenced on ___________, 1996. Brim, Inc. By: ___________________________ Its: __________________________ Encore Senior Living, LLC By: ___________________________ Its: __________________________ 14 15 EXHIBIT C SPACE SUBJECT TO LEASE RESTRICTIONS [SEE ATTACHED FLOOR PLAN] 15 16 EXHIBIT D RIGHT OF FIRST REFUSAL SPACE [SEE ATTACHED FLOOR PLAN] 16 EX-23.2 20 CONSENT OF ERNST & YOUNG LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated April 30, 1997, except for Note 16, and Notes 1 and 17, as to which the dates are May 8, 1997 and October , 1997, respectively, in the Registration Statement (Form S-1) and related Prospectus of Province Healthcare Company (formerly known as Brim, Inc. until January 16, 1997 and as Principal Hospital Company from January 16, 1997 until October , 1997) for the registration of 6,555,000 shares of its common stock. Ernst & Young LLP Nashville, Tennessee October , 1997 The foregoing consent is in the form that will be signed upon the completion of the reincorporation described in Note 17 to the consolidated financial statements. Ernst & Young LLP Nashville, Tennessee October 8, 1997 EX-23.3 21 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23.3 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Province Healthcare Company (formerly known as Brim, Inc. until January 16, 1997 and as Principal Hospital Company from January 16, 1997 until October 1997) We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Portland, Oregon October 8, 1997 EX-23.4 22 CONSENT OF HARRELL, RADER, BONNER & BOLTON 1 Exhibit 23.4 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated July 25, 1997 and August 23, 1994 with respect to the consolidated financial statements of Memorial Hospital Foundation -- Palestine, Inc., in the Registration Statement (Form S-1) and related Prospectus of Province Healthcare Company (formerly known as Brim, Inc. until January 16, 1997 and as Principal Hospital Company from January 16, 1997 until October 1997) for the registration of common stock. Harrell, Rader, Bonner & Bolton Palestine, Texas October 8, 1997 -----END PRIVACY-ENHANCED MESSAGE-----